File photo shows an Alcoa aluminum plant in Alcoa, Tennessee Thomson Reuters By Nick Carey

CHICAGO (Reuters) - Metals firm Alcoa Inc said on Monday it would split into two publicly-traded entities, acknowledging that its legacy aluminum operations and higher-value and automotive businesses were diverging and no longer compatible.

New York-based Alcoa's traditional smelting business has been hurt by a ballooning surplus of aluminum, which has caused prices to sink and deepened the industry's worst crisis in years.

At the same time, the company has bet on growth from higher-margin titanium and high-strength aluminum sales to the aerospace industry, citing a growing order book for airplane production and renewed global spending on automobiles. Airplane manufacturers have turned to lightweight titanium from aluminum and automakers to new, strong aluminum alloys instead of high-strength steel to improve performance and fuel efficiency.

Efforts by the world's third-largest producer of aluminum to address these diverging trends resulted in conflicting messages for investors, according to sources close to the company.

The split is expected to take place in the first half of 2016 and the legacy aluminum firm will retain the name Alcoa, the company said. Chief Executive Officer Klaus Kleinfeld will become CEO of the new, unnamed entity and will remain chairman of Alcoa throughout the transition period.

The company did not provide a timeline for choosing a CEO for Alcoa after the split. The division of the company does not need to be approved by shareholders, sources familiar with the matter said.

The legacy business had revenue of $13.2 billion in the 12 months ended June 30 and EBITDA of $2.8 billion, with 64 facilities and around 17,000 workers.

The new firm created by the split had revenue for the same period of $14.5 billion, with EBITDA of $2.2 billion, 43,000 workers and 157 facilities. Through a series of acquisitions, the company says it is well positioned to take advantage of growing aerospace and automotive markets in the years to come.

About 40 percent of the revenue for the new "value-added" business came from the aerospace sector – a key area targeted for growth - for that period.

While Alcoa has tried to figure out what to do with its legacy business, including selling off some of its more traditional and costly smelting facilities, it has also been investing heavily in acquisitions to bolster its aerospace and automotive operations.

Recent purchases include aerospace and defense industry-focused titanium supplier, RTI International Metals Inc, for $1.3 billion and privately-held TITAL, which makes titanium and aluminum structural castings for aircraft engines and airframes.

Falling aluminum prices led to Alcoa missing second-quarter earnings estimates and, year to date, the company's stock is down more than 42 percent. Some analysts have suggested that a split would benefit the company's aerospace and automotive business and could lead to a takeover of its traditional aluminum business.

NEW ALLOY FOR CAR MAKERS

The company has also been working to improve its own in-house technology. Last December, Alcoa unveiled a process it calls Micromill to produce high-strength aluminum alloy, targeting automakers who are seeking an alternative to heavier steel.

Micromill-made aluminum goes from molten metal to cooled, coiled metal in 20 minutes versus the 20 days it takes to roll conventional aluminum. It is 30 percent stronger than regular aluminum, and far easier to shape into more intricate forms, including inside panels for car doors or fenders.

In mid-September Alcoa announced a deal with Ford Motor Co to provide multiple components for the 2016 model F-150 pickup, the best-selling U.S. vehicle since 1982, using Micromill. Alcoa has said it is in talks with eight other automakers on using Micromill technology, but has not disclosed names.

Meanwhile, a 25 percent drop in aluminum prices since last September has pushed benchmark London Metal Exchange prices to six-year lows. An unprecedented plunge this year in premiums –surcharges paid for physical delivery - to their lowest in 3-1/2 years have posed the biggest threat to producers' margins since the 2008 financial crisis.

As a result, more than 10 percent of smelting capacity outside of China, or 3.5 million tons of production, is running in the red. Alcoa Inc has closed or curtailed 170,000 tons of annual output this year as part of a review of 500,000 tons of smelting capacity announced in March.

(Reporting By Nick Carey; Editing by Michele Gershberg and Ed Davies)