Friday, October 19, 2007

Acquisition of Novelis by HIndalco - Case Study


Hindalco Industries Ltd has informed BSE that Novelis Inc. on May 15, 2007 has announced the completion of its acquisition by the Company. The transaction makes the Company with Novelis, the world’s largest aluminum rolled products Company and one of the largest producers of primary aluminum in Asia, as well as being India's leading copper producer. Novelis will operate as a subsidiary of the Company. The Company entered into an agreement with Novelis, dated February 10, 2007, to acquire the Company in an all-cash transaction which values Novelis at approximately US $ 6.0 billion, including debt. Under the terms of the agreement, Novelis shareholders will receive US $ 44.93 in cash for each outstanding common share. Novelis shareholders approved the transaction at a special meeting on May 10. Based in Mumbai, India, the Company is the flagship Company of the Aditya Birla Group, a multinational conglomerate with annual revenue of US $ 14 billion and a market capitalization in excess of US $ 23 billion.

The transaction was accomplished by way of a statutory plan of arrangement under Canadian law. The Company through its wholly-owned subsidiary AV Metals Inc., acquired 75,415,536 common shares of Novelis, representing 100 percent of the issued and outstanding common shares. Immediately after closing, AV Metals Inc. transferred the common shares of Novelis to its wholly-owned subsidiary AV Aluminum Inc. Novelis’ stock has ceased trading on the New York Stock Exchange. De-listing on the New York Stock Exchange and the Toronto Stock Exchange is expected to occur shortly.

About Novelis

Novelis is the world leader in aluminum rolling, producing an estimated 19 percent of the world's flat-rolled aluminum products. We are the No. 1 rolled products producer in Europe, South America and Asia, and the No. 2 producer in North America. Novelis is a global leader in the production of aluminum rolled products market. It has operations in four continents comprised of 34 operating facilities in 11 countries. The company caters to markets like:

a. Building and construction
b. Cans and closures
c. Flexible and semi-rigid packaging
d. Printing and Lithography
e. Speciality Consumer and Industrial
f. Automotive and Transportation
g. Distribution Services
h. Technology sales.
With industry-leading assets and technology, we produce the highest-quality aluminum sheet and foil products for customers in high-value markets including automotive, transportation, packaging, construction and printing. Our customers include major brands such as Agfa-Gevaert, Alcan, Anheuser-Busch, Ball, Coca-Cola, Crown Cork & Seal, Daching Holdings, Ford, General Motors, Lotte Aluminum, Kodak, Pactiv, Rexam, Ryerson Tull, Tetra Pak , ThyssenKrupp and others.

Novelis is also the world leader in the recycling of used aluminum beverage cans. Annually, we recycle more than 35 billion used beverage cans -- enough to circle the earth more than 100 times.

Novelis is globally positioned, operating in 11 countries with approximately 12,900 employees. In 2006, the company reported net sales of $9.8 billion.

About Hindalco

Based in Mumbai, India, Hindalco is one of the most cost-efficient aluminum producers globally. Hindalco’s stock is publicly traded on the Bombay Stock Exchange, the National Stock Exchange of India Limited and the Luxembourg Stock Exchange. Visit

Hindalco is the flagship company of the Aditya Birla Group, a $14 billion multinational conglomerate, with a market capitalization in excess of $23 billion.

A key tenet of Hindalco's strategy is continuous growth. The Company has taken two major initiatives in this direction in the recent past. In 1999, the company acquired a 74.6% controlling stake in Indian Aluminum Co. Ltd. (INDIAL), a leader in the alumina and semi-fabricated business. The second of the initiatives was a brownfield expansion of facilities at a cost of Rs. 1800 Crores. The expansion added 100,000 TPA to Smelting Capacity along with a 210,000 TPA increase in Alumina Rifining Capacity and matching augmentation of Power Generation Capacity.


The combination of Hindalco and Novelis will establish a global integrated aluminum producer with low-cost alumina and aluminum production facilities combined with high-end aluminum rolled product capabilities. The complementary expertise of both these companies will create and provide a strong platform for sustainable growth and ongoing success.

A strategy lies behind the proposed merger between India's largest aluminum producer, Hindalco Industries, and Canada's Novelis (nyse: NVL - news - people ), the biggest producer of flat-rolled aluminum products, whose customers include Coca-Cola (nyse: KO - news - people ), Anheuser-Busch (nyse: BUD - news - people ) and General Motors (nyse: GM - news - people ). With Hindalco's own cheap supplies of bauxite and coal, the purchase of a downstream producer like Novelis, which was spun off from Alcan (nyse: AL - news - people ) after its former U.S. parent bought Pechiney of France in 2004, would make Hindalco the same sort of integrated producer that many oil companies strove to be in the 1990s.

This will not only help Hindalco penetrate highly valued US and other western markets (Novelis has operations in 11 countries) but also help the shareholders to regain their investment (Novelis is presently a loss making company).
Both the companies involved in the merger action are present leaders in their respective markets; Hindalco in the low cost aluminum production and Novelis in the aluminum rolled products.

The most important synergy that the companies can be looking for with this merger is the fact that Novelis is a producer of aluminum products whereas Hindalco is the lowest cost base metal producer in the world as far as aluminum is concerned. Before the merger the issue with Novelis was to procure raw material from the market, which it converts into value-added products at the most reasonable prices. Hindalco on the other side has announced capacity expansion plans in a major way in the coming three to five years. Once that is done, it can supply the raw material to Novelis at a very economic cost as Novelis does not produce the inputs to its process (aluminum) in part or whole. This will help Novelis in bringing down its cost of production, particularly at a time when metal prices, particularly aluminum are running strong, which in turn will help Novelis to improve upon its margins and it will get reflected in the balance sheets of both the companies.

Hindalco’s motive behind this merger action has been the major market share that Novelis possesses. For Hindalco to build such a big market presence as that of Novelis by its own would had taken a very long time, which is the reason why this would be a very advantageous move for Hindalco as far as company strategy is concerned.
One of the matters of concern for Novelis right now is the price that it is paying to have got into contracts with some major clients. According to this contract, Novelis will provide cans at a price which is tapped, beyond which Novelis will incur the cost. With aluminum prices going over through the roof, Novelis has to bear it all. From the performance reports, it was evident that Novelis had incurred huge losses which will tend to decrease as most of its contracts with tapped prices will get over by the end of 2007. Along with this, if the aluminum prices go down in the coming months, it would add to the profitability of the group companies.

The risk associated in the merger of these two entities is perceived to be a little higher on account of the sheer size of the two companies. There has been a school of thought which says that Hindalco which paid a price of about 6 billion USD is a little too much for the merger. This was one of the reasons for the poor performance of Hindalco stocks after the merger took place. But with three months into the merger it is too primitive to comment on whether the merger has been a success for the two companies or not. The major risk that can be associated as of now for both companies are the post-merger integration issues for the two companies. Also one of the reasons which lead to an immediate fall in the prices of for Hindalco is the fact that Novelis has a high amount of debt which is in the range of 2.33 billion US dollars and a debt to equity ratio of 7:1. Strategy wise, hindalco will try its level best to provide Novelis with raw aluminum at the lowest possible prices but the effect of Hindalco’s raising debt for the merger on Novelis’s books and its effect on the consolidated balance sheet of Hindalco is a matter of concern for most investors. Also in the backdrop of increasing prices of Aluminum, Hindalco will gain but Novelis will be at a loss considering the contracts with the clause of tapped prices for supplying aluminum cans is concerned. So there is a possibility that the performance of the two companies may be completely opposite to each other.

The counterview to the argument that deal being over-priced is that Hindalco is getting a ready-made market, ready-made customers, ready product profile and its size has also tripled by the merger. Here economies of scale are to make a big impact on the extend of success of the merger. For Hindalco, technology and process leadership, cost-effective manpower and ready market will help rationalize the cost structures and balance the pressure on the bottom lines.

The Deal

Hindalco has acquired Novelis in an all-cash transaction which values Novelis at approximately US$6 billion, including approximately US $2.40 billion of debt. Under the terms of the agreement, Novelis shareholders will receive US $44.93 in cash for each outstanding common share roughly 15 per cent premium to the market price

AV Metals — the A V Birla group's Canada-based special purpose vehicle (SPV) - will infuse US$ 3.5 billion to finance Hindalco's proposed acquisition.

Putting aside the US$ 2.4 billion debt burden of Novelis, the cash component for financing the deal stands at US$ 3.5 billion.

Of this amount, AV Metals will take loans worth US$ 2.8 billion from three financial institutions, namely UBS, ABN Amro and Bank of America. This includes a bridge loan of US$ 1.4 billion at a coupon rate of 7.2 percent. These three institutions have underwritten the debt amount with UBS taking care of the majority portion. UBS is the financial advisor to Hindalco.

Essel Mining & Industries, a closely held company of the group, will bring in US$ 300 million while Hindalco will mobilize US$ 450 million from its treasury operations.
Hindalco would need at least 10 years to replace Novelis' assets, which have a replacement value of US$ 12 billion

Novelis' revenues stood at $8.5 billion in 2005 and it posted net loss of $102 million during the third quarter of 2006 (the calendar year is the company's fiscal year). It is a widely held company and its shareholders are largely hedge funds and institutional investors.
The company operates in 11 countries, has 36 operating units and 12,500 employees. The deal would be financed through recourse debt of $2.8 billion. Hindalco's treasury would contribute $450 million, while SL Iron Ore Mining, another group company, would contribute $300 million as debt.
Novelis already carries $2.4 billion of debt, of which $1 billion comprises term loans and $1.4 billion high-yield loans. The deal will lead to the debt-equity ratio of Hindalco going up. The ratio is at present at 0.2-0.
Post-acquisition, over 50 per cent of the group's business could come from operations outside India, which is currently at 30 per cent.


• The acquisition will help Hindalco to shorten the learning curve for technology, which was a need for Hindalco. Hindalco has strong presence in upstream and metal businesses, while Novelis is a world leader in downstream businesses. The combination will make us immune to the high volatility in commodities markets
• A recent research note from Merrill Lynch speculating on the possibility of such a deal said the negatives could outweigh the positives. Merrill analyst Vandana Luthra pointed out that during periods of rising aluminum prices, margins are sharply squeezed, as selling prices for finished product do not increase commensurately. For instance, price ceilings on beverage cans in the U.S. recently hurt Novelis margins - in the first nine months of 2006, the company lost US$ 170 million.

"In my opinion, they are overpaying," said Stewart Spector, an aluminum-industry consultant with offices in New York and Florida. "It seems to me that US$ 6 billion is an awful big premium to pay for a messy operation."
• According to Hindalco's Bhattacharya, the deal made strategic sense. "The Novelis acquisition will give us immediate scale and a global footprint," he said.

Hindalco would need at least 10 years to replace Novelis' assets, which have a replacement value of US$ 12 billion, he said.
• Hindalco would enter the Fortune 500 league three years before it was scheduled to do according to its internal targets.
• Overseas operations already account for nearly 30 per cent of the group's revenue now and the Novelis acquisition would increase it to 40 per cent in three years
• The group would now have operations in 14 countries — the US, UK, Thailand, Malaysia, Laos, Indonesia, Philippines, Egypt, Canada, Australia, China, Germany, Hungary and Portugal..
• The acquisition of Novelis also means that the group would become the world's largest player in the downstream aluminium business involving value-added products
• The Novelis management will remain unchanged after the acquisition. Hindalco will take a call on joining the board later. There will be no job cuts at Novelis

1 comment:

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