Odd Paul Singer Showdown Was Just Start of Arconic's Trouble

(Bloomberg) -- It’s been eight months since Arconic Inc. split from aluminum giant Alcoa Corp.

In that time, it endured a bruising (and bizarre) proxy battle that cost the CEO his job; had one of its products implicated in London’s deadly high-rise fire; and, now, in the latest blow, suffered quality problems with a jet-engine part that forced Boeing Co. to delay delivery of a highly sought-after plane, according to people familiar with the matter.

The missteps are complicating Arconic’s nascent strategy to remake itself by focusing on selling high-value products for the aerospace and automotive industries, while Alcoa sticks with the slow-growing aluminum business. It was seen as a tricky transformation in any case, but now, at least initially, it’s been made more challenging without a permanent chief executive officer to guide the company through the high-profile distractions. After peaking at $30.55 in February, the stock has sunk 25 percent.

Odd Paul Singer Showdown Was Just Start of Arconic's Trouble

“It’s not been an easy ride,” said Josh Sullivan, an analyst with Seaport Global Securities.

A spokeswoman for Arconic declined to comment.

Klaus Kleinfeld, who had pushed the corporate split, stepped down as Arconic’s CEO in April after sending an unauthorized letter -- and soccer ball -- to Elliott Management Corp. boss Paul Singer in the midst of the proxy fight. Elliott described the letter as intimidating and Arconic directors said Kleinfeld showed “poor judgment.’’

Odd Paul Singer Showdown Was Just Start of Arconic's Trouble

The shareholder fight ended in a truce in May when Elliott won the right to three seats on Arconic’s board. Appointment of a new CEO is expected later this year. Analysts say that Arconic is positioned to expand profit margins, particularly if it can further bolster its roster of leaders with aerospace experience.

This week, the New York-based company spooked Wall Street after disclosing its role in the U.K. fire tragedy, which may make it vulnerable to big litigation bills. Arconic, when it was still part of Alcoa, supplied a product that was used in the cladding system for Grenfell Tower.

Material Information

Arconic drew criticism over its disclosures in response to media inquiries. On Monday, the company said it would stop selling the product, known as Reynobond PE, and later that day clarified that it had provided one component to the cladding, but not the insulation thought to have spread the fire.

Arconic’s involvement in the tragedy was material information, judging from the market response, and should have been disclosed earlier, according to Carol Levenson, research director with Gimme Credit Publications Inc.

“Ironically, the management that Elliott complained about so bitterly is gone,’’ Levenson said in an email. “But the way Arconic handled the Grenfell situation seems to have been with classic Arconic (and Alcoa) arrogance.’’

Worse Scenario

It is too soon to know what costs beyond its insurance coverage the manufacturer may have to bear, or the role it will play in any criminal inquiry into the event.

In the worst scenario, Arconic would be deemed responsible and face penalties and costs ranging from hundreds of millions to billions of dollars, Rajeev Lalwani, an aerospace analyst with Morgan Stanley, said in a June 27 report. The distractions alone might hinder the company’s restructuring, he added.

The CEO search may also be affected if directors decide they now need a crisis manager at the helm. Elliott had been lobbying for aerospace veteran Larry Lawson in the top job. He is a tough-nosed operator credited with turning around Lockheed Martin Corp.’s F-35 fighter program, and Spirit AeroSystems Holdings Inc., Boeing’s largest supplier.

The Boeing snag involved quality issues detected in turbine discs, forged by Arconic, that are used in the engines of the new 737 Max, as reported earlier by Bloomberg. Boeing was forced to briefly ground the plane in early May, days before the jet was due to begin commercial service, people familiar with the matter said. The plane is Boeing’s fastest-selling, having accumulated more than 3,700 orders before its commercial debut.

Business Prospects

Arconic risks losing revenue as a result of the problems. CFM, a venture between General Electric Co. and Safran SA that makes the engine, has been replacing the discs in 30 engines recalled from Boeing, and increased its reliance on another forging company for the parts, Olivier Andries, CEO of Safran Aircraft Engines, said in an interview. Boeing declined to comment.

Smoothly increasing production rates on parts for engines is “the primary operational challenge ahead” for Arconic, Seth Seifman, an analyst at JPMorgan Chase & Co., said in a note Friday. Still, management said “the company has encountered no engine issues thus far that would prevent it from delivering on financial commitments,” according to the note.

Indeed, if Arconic can steer through its P.R. issues and improve operations, the business prospects remain strong as Boeing and Airbus boost narrow-body jetliner production by one-third over the next two years. The supplier reeled in more than $13 billion of new contracts for light-weight metals, 3-D printed parts and advanced alloys that allow the newest jet engines to operate at temperatures that would melt ordinary metals.

“The whole strategy of Arconic under Klaus Kleinfeld was technology differentiation,” said Kevin Michaels, a consultant who specializes in aerospace supply chain and manufacturing issues. “He repositioned the company and took on a lot of risk.”