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U.K. Fire Puts Arconic on Its Heels -- WSJ

27 Jun 2017 6:32 am
By Bob Tita 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the US print edition of The Wall Street Journal (June 27, 2017).

Arconic Inc. said it has stopped selling panels used on the exterior of high-rise buildings that are suspected of contributing to the spread of a deadly fire in a London apartment tower earlier this month.

The U.S.-based aerospace and building materials specialist on Monday said the decision reflected "inconsistency" in building codes around the world. The fire that killed 79 people in London's Grenfell Tower on June 14 has already prompted a widespread review of construction safety standards in the U.K.

The move by Arconic triggered a sharp fall in its shares, as analysts questioned whether its role in supplying the panels could entail potential liabilities and affect its search for a new chief executive following a tumultuous six months that included a proxy battle with activist investors.

Arconic, formerly part of Alcoa Corp., produces panels under the Reynobond PE brand that go into cladding for buildings. Reynobond PE panels aren't allowed by regulators on tall buildings in the U.S. and some other countries because of the potential fire hazard. The panels have been widely used in the U.K., including the recently refurbished Grenfell Tower.

"Because of the inconsistency of building codes across the world and issues that have arisen in the wake of the Grenfell Tower tragedy regarding code compliance of cladding systems, Arconic is discontinuing global sales of Reynobond PE for use in high-rise applications," the company said in statement. A spokesman said the panels would still be sold for use on low-rise buildings that are generally more accessible for firefighters.

"Our product is one component in the overall cladding system; we don't control the overall system or its compliance," the company said later in a statement.

Reynobond PE consists of two aluminum sheets sandwiching a polyethylene core. The Grenfell Tower's facade is suspected of having aided the fire's advance. Investigators suspect the blaze spread through a narrow gap between the burning polyethylene core in the Reynobond panels and a layer of insulation attached to the exterior of the apartment building.

Arconic's involvement in the cladding used on the building had been known for some days, but its decision to halt sales and concerns about potential liability cut about $600 million from the company's market value on Monday.

The stock ended down 6% at $24.01 in very heavy trading, with seven times the usual volume of shares changing hands.

Analysts said Arconic's involvement raised questions over how building-products manufacturers could be exposed to potential liabilities after installation.

"This is more than just Arconic," said Josh Sullivan at Seaport Global Securities. "I've got to think the big material manufacturing companies around the world are going fight this."

J.P. Morgan analysts said in a client note that "several entities" were involved in the decision to use the cladding panels in Grenfell Tower, many of which may bear "significantly more responsibility" than Arconic.

Reynobond PE is marketed around the world. In the U.S., its use is generally limited to lower buildings because of fire-safety concerns.

U.K. officials have said the material didn't meet building standards for towers whose height exceeds 18 meters, or about 59 feet. But U.K. building industry experts and the company that supplied the material to contractors working on Grenfell Tower maintain that it is compliant with current building codes.

In the wake of the fire, the U.K. government has identified about 600 social-housing towers -- properties owned by local authorities as well as nonprofit housing associations -- across the country that have installed similar cladding. So far it has tested samples from 75 for inflammability, and all have failed the tests, Sajid Javid, minister for communities and local government, said in Parliament Monday. The government hasn't specified whether the samples tested were Reynobond PE.

Arconic makes other varieties of Reynobond that feature a fire-retardant filling. Those weren't used in the Grenfell Tower refurbishment.

The Reynobond line is part of Arconic's transportation and construction products business, which generated $1.8 billion of sales last year, about 15% of the company's total revenue. The construction portion of the transportation and construction unit accounted for about 55% of the sales.

The Reynobond issue poses a new distraction for a company trying to steady itself after a long, bitter proxy fight earlier this year with activist investors that resulted in the resignation of longtime CEO Klaus Kleinfeld. He was replaced by veteran aerospace executive and Arconic board member David Hess as interim CEO.

"Arconic's search for a permanent, operating-focused CEO is made harder by this incident," said analyst Gautam Khanna at Cowen & Co.

--Wiktor Szary contributed to this article.

Write to Bob Tita at robert.tita@wsj.com

(END) Dow Jones Newswires

June 27, 2017 02:32 ET (06:32 GMT)

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