Hindalco Industries Limited, a flagship company of the Aditya Birla Group, structured into two strategic businesses aluminium and copper with a consolidated turnover of US $13 bn and a market capitalization in excess of US $ 23 bn. The company established in 1958 and its operations commenced in 1962 with an aluminium facility at Renukoot in Uttar Pradesh. It has today grown to become the country's largest integrated aluminium producer and ranks among the top quartile of low cost producers in the world. The aluminium division's product range includes alumina chemicals, primary aluminium ingots and billets, wire rods, rolled products, extrusions, foils and alloy wheels. It enjoys a domestic market share of 42 per cent in primary aluminium, 63 per cent in rolled products, 20 per cent in extrusions, 44 per cent in foils and 31 per cent in wheels. [1] Hindalco has launched several brands in recent years, namely Aura for alloy wheels, Freshwrapp for kitchen foil and Ever last for roofing sheets.
Hindalco Industries Limited has a 51.0% shareholding in Aditya Birla Minerals, which has mining and exploration activities focused in Australia. The company has two R&D centres at Belgaum in Karnataka and Taloja in Maharashtra. The Government of India's Department of Scientific and Industrial Research (DSIR) have also recognized the company.
All the units of the company are ISO 9001:2000, ISO 14001:2004 and OHSAS 18001 certified. The company is also accorded with the 'Star Trading House' status in India. Hindalco's aluminium metal is acceptable for delivery under the High Grade Aluminium Contract on the London Metal Exchange (LME). Their copper quality standards are also internationally recognized and registered on the LME with 'Grade A' accreditation.
Novelis ('the Target'):
Novelis is the world leader in aluminium rolling industry with a global market share of 19% in flat rolled aluminium products. It caters to the market needs of automotive, transportation, packaging, construction and printing industry. Novelis is also the world leader in the recycling of used aluminium beverage cans. It recycles around 35 bn beverage cans every year.
Novelis is globally positioned, operating in 11 countries with approximately 11,600 employees. It has 11 facilities in North America, 13 plants in Europe, three facilities in Asian Region and 2 plants in Brazil. Its revenue for fiscal year 2010 was $8.7 bn.
Novelis was formed in year 2005 as a spin off from Alcan Inc. Alcan Inc., now a part of Rio Tinto Alcan, was an international aluminium company that started its first operation in Canada in 1916 and became the third largest aluminium producer in the world after Alcoa and Rusal in year 2007 (Alcoa being its ex-parent company split from it in year 1928). It became Rio Tinto Alcan following a friendly acquisition by a Canadian company called Rio Tinto Canada Holding Inc in November 2007.
The spinoff of Novelis from Alcan was a forced spinoff. Alcan merged with a French company called Pechiney in November 2003. It gained a near monopoly in aluminium industry with its bauxite mines, aluminium facilities and rolling mills. This resulted in US & Europe starting anti-trust proceedings against Alcan. Therefore, Alcan divested its rolled products business resulting in Novelis being formed as a separate entity.
Novelis has had many troubles since its genesis. During the spin-off, it inherited a debt of $2.9 bn on a capital base of $500 mn. Later, the debt had reduced but it had incurred huge losses due to a Himalayan blunder made by its management.
The management had signed a contract to sell products to soft drink manufacturers at a pre-set price, even if the raw materials price shot up, in a bid to gain more business. Unfortunately, price of aluminium shot up by 39 % leading to losses of $350 mn on these products.
Novelis was later acquired as a wholly owned subsidiary by Mumbai-based Hindalco in the year 2007. Though Novelis is a young company established only five years back, it inherits a 90 year old experience, knowledge and structure in the aluminium business from the industry major Alcan.
Transaction Details
Deal Structure
Hindalco entered into a definitive agreement with Novelis Inc. on 10th February 2007 for acquiring all outstanding common shares of Novelis at USD 44.93 per share in cash for a total consideration of approximately USD 3.5 bn.
This agreement was approved by the Ontario Superior Court of Justice on 14th May 2007.
On 15th May 2007, Hindalco acquired Novelis Inc., through its wholly owned indirect subsidiary A V Metals Inc. (acquisition subsidiary) by buying all the outstanding common shares of Novelis at a price of US$ 44.93 per share in exchange for cash payments.
Immediately after the deal, the common shares of Novelis were transferred from acquisition subsidiary to the company's wholly owned indirect subsidiary A V Aluminium Inc., a company established in Canada for acquisition purpose. A V Aluminium Inc is a wholly owned subsidiary of A V Metals Inc which in turn is a wholly owned subsidiary of A V Minerals (Netherlands) B.V.
A V Metals and A V Minerals (Netherlands) B.V were the 2 SPVs created for acquisition. India's taxation treaty with Canada is such that the dividend payments received from the foreign company are taxed at both the ends. In order to avoid double taxation, another SPV was created in the Netherlands and the shareholding was transferred through it.
Deal Financing
The acquisition of Novelis by Hindalco was an all-cash transaction, which valued Novelis at an enterprise value of approximately USD 6.0bn, including approximately USD 2.4bn of debt.
For the purpose of acquisition, Hindalco secured commitments of USD 3.1bn bridge loan of 18 months at an interest rate of 8.92% p.a. against the corporate guarantee of the company and the balance of USD 450mn was financed by the company by way of infusing equity, preferred stock and other securities in its wholly owned subsidiaries.
Hindalco obtained commitment of funds from ABN AMRO, Bank of America and UBS of USD 3.1 bn with recourse to the company and secured by Hindalco´s corporate guarantee for paying the shareholders of Novelis. It also obtained backstop facility of approximately USD 2.4 bn from UBS and ABN AMRO for refinancing the existing loans on Novelis' balance sheet with recourse limited to the cash flows and assets of Novelis.
As on 31st March 2008, the company had invested a total amount of Rs. 25327.20 mn. Out of this Rs. 19114.30 mn, (equivalent to USD 450mn), was invested towards initial equity contribution in A V Minerals for the purpose of acquisition of Novelis. [2]
A V Minerals Inc and A V Metals Inc funded the balance amount of Rs. 6,212.90 mn as equity towards payment of interest for the year on total bridge loan of USD 3.1 bn for a period of 18 months taken by these companies for acquisition.
Valuation of Novelis
The Novelis management, in its guidance had indicated a pre-tax profit of USD 35 mn-100mn for 2007. At the optimistic end of the guidance, the price Hindalco paid translated to a market capitalization/profit before tax (PBT) multiple of 36. (In comparison, Corus sold its aluminium business in 2006 to Aleris Inc. at a m-cap/PBT multiple of 18) [3]
Based on Novelis' guidance and consensus forecasts for 2007, Hindalco paid 11.4x EBITDA, 20.7x EBIT or 53.4x PE. [4]
The aggregate purchase price for Novelis' common shares was USD 3.4 bn and the consideration and the transaction costs paid by the company was allocated to the assets acquired and liabilities assumed as follows:
Source: Hindalco FY08 Annual Report
Motives / Implications:
The primary objective of the acquisition of Novelis was establishing a strategic footprint in the global market and the deal was part of the inorganic global expansion plans of Aditya Birla Group's Hindalco.
"The acquisition will catapult the group into the Fortune 500 league, three years ahead of the target (i.e. target of doubling turnover to US $20bn by the year 2010). The combination of Hindalco and Novelis will establish a global integrated aluminium producer," Kumar Mangalam Birla had said.
As the statement points out, the reason for acquiring Novelis was more than just a strategic fit. It was more about enhancing the scale and the scope of its operations in the global aluminium business.
The following points made Novelis an attractive proposition for Hindalco:
Novelis is a global leader with 19% of the total market share in flat-rolled aluminium products
Hindalco will get access to the latest 'Novelis Fusion' technology, a breakthrough material technology that combines multiple aluminium alloys into one unique product, for value added products is unique and transforming.
Hindalco would require a minimum of 8 - 10 years and a fortune for building facilities that can match the 29 plants of Novelis across four continents with production capacity of 3.3 mn tonnes, if Hindalco was to take an organic route of expansion [5]
Hindalco would have to spend US $12bn to build capacities equivalent to Novelis. Hence considering the replacement value and also the time required; the deal looks a step in the right direction for Hindalco
The deal will give Hindalco a very strong presence in the aluminium recycling business. As per characteristics of aluminium, it is infinitely recyclable and uses only about 5% of the energy to produce primary aluminium when it is recycled
Novelis' clientele includes reputed names like Coca-Cola, General Motors and Ford that will benefit Hindalco's business in the long term
Another important reason in favour of the deal was to balance the portfolio of Hindalco, which primarily involved the highly volatile upstream operation. By entering into the downstream operations, Hindalco could leverage its position and successfully hedge against its operational volatility. Even though Novelis' downstream business had lower operating margin, it could provide steady cash flows
Performance Post Acquisition:
The acquisition of Novelis led to CRISIL downgrading the long-term rating of Hindalco from AAA to AA, indicating increase in risk factors in terms of credit worthiness. The downward revision in the long-term rating reflected increase in the company's financial risk after its largely debt-funded acquisition of Novelis. [6]
The short-term horizon post acquisition still looks a bit uncertain in Novelis' key market of North America, but shipments have been higher in Europe, Asia and South America. In addition, Novelis' infamous contracts with price ceilings, which prevented metal prices from being passed on entirely to customers, will end in December quarter 2010. This will lead to an increase in the net earnings and in its EBIDTA levels. It has now hiked conversion prices charged to customers for new contracts that would be reflected in its earnings in coming quarters. [7]
For the September quarter of 2010, its adjusted EBITDA rose to $200 mn (Rs. 942 crore) from $124 mn in the previous quarter and $89 mn in the year-ago period. The improvement has come partly due to cost savings extracted by the company from its operational efficiencies and partly due to an improvement in volumes (up 4% sequentially). The company is currently saving about $100 mn in costs, on an annualized basis, and expects the number to jump by about 40% in a year's time. [8] A snapshot of the financials post acquisition is as follows:
Source: www.hindalco.com/media/press_reports
Hindalco came out with a rights issue in 2008 that helped its balance sheet. Hindalco's consolidated balance sheet, too, appears stronger. Its debt-to-equity ratio has improved to 1.1 times as of 31 March 2010, from 1.8 times a year ago and from 7.68 times at the time of acquisition. This allows Hindalco to fund its domestic expansion plans without unduly straining its balance sheet.
In the longer term, Hindalco's performance will be driven both by its domestic expansion programme and continued growth at Novelis. In the near term, however, falling aluminium prices could pose a threat to the profitability improvements as seen in recent quarters.
