Kennametal Acquires ATI Tungsten Business for $605 Million

The Wall Street Journal recently reported that Kennametal Inc. (Latrobe, PA) is buying Allegheny Technologies Inc.’s (Pittsburgh, PA) tungsten business for $605 million, a deal that sheds light on an obscure but important part of the metals business.

The two western Pennsylvania companies, each of which has a market value above $3 billion, buy scrap and other raw materials and process them into powder coatings, alloys and tools used by manufacturers of everything from mining drills to airplanes.

Tungsten, one of the densest elements, is mostly used as a hardening alloy in products such as light bulbs, X-ray tubes and catalysts. Selling products associated with the metal is Kennametal’s core business, accounting for 80 percent of its sales, according to chief executive Carlos Cardoso.

By purchasing one of the biggest tungsten businesses in the world, Kennametal will be able to expand in the aerospace and energy sectors and reduce its raw-material costs. Part of the ATI operation recovers tungsten from scrap.

Cardoso explained that tungsten, which is harder than steel and titanium, is particularly difficult to recycle, something the research-and-development team at ATI has learned how to do. “Only a few companies in the world can recycle tungsten,” he said. He added that less than 10 percent of discarded tungsten is currently recycled.

“These are very specialized businesses, and there aren’t huge numbers of competitors,” said Charles Bradford, an analyst for Bradford Research Inc. (New York, NY). “And it makes sense to consolidate. Why have two sets of scientists doing R&D on tungsten?”

Cardoso said the acquisition would help Kennametal expand overseas. The company currently registers 45 percent of its sales outside North America and would like to increase that figure to 67 percent, he said.

Cardoso noted that it was too early to tell if the acquisition would lead to layoffs. ATI’s tungsten business employs 1,175 people. Kennametal employs 13,000 people.

Kennametal said it would pay for the acquisition with cash and loans, and that the deal wouldn’t adversely affect its results for the current fiscal year, which ends in June.

For ATI, the sale will allow the company to focus more on high-performance metals and flat-rolled items. ATI said its growth opportunities would be focused on other businesses, especially in aerospace and oil and gas, with products such as jet-engine parts made of forged nickel and titanium.

In the short term, “the sale strengthens [ATI’s] balance sheet,” wrote analyst Mark Parr of KeyBanc Capital Markets (Cleveland, OH).

Kennametal reported $203.3 million in net on revenue of $2.6 billion in fiscal 2013, compared with a profit of $307.2 million on sales of $2.7 billion a year earlier. ATI notched a profit of $158.4 million on sales of $5.03 billion last year, compared with a profit of $214.3 million and sales of $5.18 billion in 2011.

J.P. Morgan Securities LLC (New York, NY) advised Kennametal on the deal, and Goldman, Sachs & Co. (New York, NY) worked for Allegheny.