By Nick Carey

CHICAGO (Reuters) - Alcoa Inc agreed to pay $1.3 billion to acquire titanium supplier RTI International Metals Inc, the metals company's latest investment in more profitable products for the aerospace and automotive industries.

Alcoa is offering the equivalent of $41 per share - a 50 percent premium over RTI's closing price on Friday in an all-stock transaction.

RTI's stock rallied nearly 40 percent, but Alcoa's shares fell 7.5 percent to a nine-month low on concern it overpaid, analysts said.

New York-based Alcoa, best-known as an aluminum producer, said around 80 percent of RTI's business is in aerospace and defense. The acquisition is its latest move to diversify into value-added products.

"This builds out our value-added business in a very attractive market - aerospace," Alcoa Chief Executive Klaus Kleinfeld said in an interview, adding that titanium is the fastest-growing metal used in aerospace production.

Last week Alcoa completed the acquisition of Tital, a German manufacturer of titanium and aluminum structural castings for aircraft.

"Basically, we've become a titan in titanium," Kleinfeld said.

Pittsburgh-based RTI, whose customers include Boeing Co, reported revenue of $794 million in 2014, and said it expected revenue of $850 million in 2015. Alcoa expects RTI's sales to reach $1.2 billion by 2019.

Alcoa, projects a compounded annual global aerospace market growth rate of 5 to 6 percent through 2019.

"Strategically, this fits in with Alcoa's ongoing transformation," BMO Capital Markets analyst David Gagliano wrote in a client note, calling the deal "expensive."

Gagliano wrote that Alcoa is paying 9.4 times RTI's estimated 2016 EBITDA, while the company has been trading at 5.9 times.

Analysts said falling aluminum prices may also be weighing on Alcoa's stock. Shares of aluminum producer Century Aluminum Co were also down nearly 3 percent on Monday.

Alcoa is reviewing 14 percent of its smelting capacity, or 500,000 tonnes, for closure, curtailment or sale, as it shifts focus from its more traditional yet costly businesses.

Alcoa has curtailed 1.3 million metric tonnes of smelting capacity since 2007, even while opening a large, low-cost smelter in Saudi Arabia.

Alcoa was advised by Greenhill & Co, Morgan Stanley and Wachtell, Lipton, Rosen & Katz, while RTI was advised by Barclays and Jones Day.

Including $330 million of RTI cash on hand and up to $517 million in RTI’s convertible notes, the transaction has an enterprise value of $1.5 billion, Alcoa said on Monday.

(Editing by Alden Bentley, W Simon and Christian Plumb)