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MY BIGGEST DEAL A $310M reconciliation for Wellspring and JW Aluminum

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Wellspring Capital Management LLC is already looking to the future after re-acquiring JW Aluminum Co. But this time around, the future involves acquisitions rather than another divestiture.

Back in 2003, Wellspring purchased JW Aluminum from Walter Industries Inc. for $125 million. Three years later, it sold JW to Superior Plus Inc., Calgary, Alberta, for $350 million.

William F. Dawson Jr., a partner at Wellspring, said it was both the opportunity to make a handsome profit combined with the fact that Wellspring at the time was drawing on a smaller investment fund and did not have the capital to expand the business.

Fate brought them back together, however. At the end of 2006, Wellspring had a much larger warchest that could provide the capital needed to expand JW Aluminum just as Superior was experiencing liquidity problems. "The timing was purely coincidental," Dawson said. Wellspring got JW back for $310 million.

Now, Wellspring has shifted to bulking up JW Aluminum. "Absolutely," Dawson said when asked if he expects Wellspring and JW to acquire further aluminum assets. "We feel there will be significant consolidation opportunities for downstream assets going forward."

In fact, since Wellspring's December purchase of JW Aluminum, the company has made two acquisitions Rollex Aluminum LLC's Jackson, Tenn., rolling mill in May, and Coastal Aluminum Rolling Mills Inc. in Williamsport, Pa., adding another mill and related coatings operations, in June.

More opportunities may be on the way. "Given what is happening with Alcoa and Alcan, there is likely to be some downstream assets becoming available," Dawson said, referring to Alcoa Inc.'s $33-billion hostile bid for rival Alcan Inc. and the likelihood that any such deal would result in divestitures to meet antitrust concerns.

Future Wellspring acquisitions will be in North America and Europe, according to Dawson, who sees the markets as similar. "Europe is slightly different because consolidation hasn't yet begun, but in time it will."

Dawson sees a future dominated by larger downstream players. "I think eventually there will be three or four large rolling companies in North America," he said, with the larger, better-capitalized players driving the consolidation.

He pointed to India's Hindalco Industries Ltd., which recently acquired Novelis Inc. for $6 billion; Texas Pacific Group, which last year bought Aleris International Inc.; and Apollo Management LP, which recently purchased the former Noranda Aluminum Inc. from Xstrata Plc for $1.6 billion. "With this group, you have three well-capitalized players who will drive consolidation," Dawson said. "Consolidation is going to happen. There really isn't a reason for single-mill operations to exist anymore. You don't get economies of scale and other manufacturing synergies. One-mill operators will gradually sell out."

Dawson expects many of the changes to occur over the next three years, and said he wouldn't be surprised to see some facilities close amid the consolidation and rationalization.

The pace and form of consolidation will to some extent be shaped by the eventual disposition of the Alcoa bid for Alcan. "There will be some high-quality downstream assets coming onto the market," Dawson said.

Dawson believes that private equity funds will play a significant role in the reshaping of the North American downstream aluminum sector. "Private equity will definitely have a presence," he said, pointing not only to Texas Pacific and Apollo but also to Wellspring, noting that strategic buyers are few and far between. "There really aren't that many strategic buyers. Hindalco is the only obvious strategic buyer of North American assets." He believes that Hindalco, which currently is still digesting its purchase of Novelis, will ultimately be a buyer of more assets.

Dawson sees four main markets for Mt. Holly, S.C.,-based JW Aluminum building sheet, fin stock, aerospace and converter foil. "Our goal is to be a significant player in each market," he said. "We're very opportunistic, and would take a look at all markets." Having a presence in multiple end-use markets also diversifies exposure to any single end-use market cycle.

Another factor contributing to JW's success is its ability to respond quickly to market conditions. "Our manufacturing capacity is very flexible," Dawson said. "If there is a downturn in building sheet, we can shift production to another end-use sector."

Right now, the aerospace and converter foil sectors seem the most ripe and ready for expansion. "We're not as we would like to be in converter foil," he said.

The aerospace sector has certainly captured Wellspring's attention. "We would definitely look to expand our aerospace presence," he said. "Clearly, aerospace is very attractive. That's one of the reasons we bought Coastal, to get into the aerospace market. It's a great market but very cyclical, so you must play the cycles correctly."

Given that most observers agree the main area of overlap in any Alcoa-Alcan combination would be aerospace, such a deal could create great opportunity for a buyer looking to overcome the significant barriers to entry, including the high cost of a greenfield project and an extremely rigorous qualifying process. "You definitely want to buy your way in (to aerospace)," Dawson said. "You don't want to take a greenfield approach."

Dawson also sees promise in the automotive sector. "Automotive will still be a big growth area as the aluminum content in cars goes up over time. A lot of auto manufacturers will accelerate their use of aluminum because of the price of fuel. Yes, aluminum is more expensive, but it yields advantages."


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