Hindalco Industries acquired Canadian aluminum company Novelis for $6 billion in an all-cash deal, making it the largest rolled aluminum producer globally. The acquisition was funded through bridge loans and Hindalco's cash reserves. It established Hindalco as a major integrated aluminum producer with downstream rolled aluminum capabilities. While the acquisition debt burden posed challenges, it provided strategic benefits like access to Novelis' technologies, customers, and global recycling business. Post-acquisition, Hindalco's financial metrics like ROE improved, though Novelis struggled initially due to pre-existing sales contracts before also improving its performance. The acquisition was assessed to be valuable for Hindalco's long-term growth in the aluminum industry.
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Hindalco's Acquisition of Novelis: The 3 Stages
1. Made by-
BFIA 3B-
Priyank Misra 75140
Puneet Arora 75141
Shantanu Vashishth 75150
Ujval Chopra 75162
Submitted to-
Dr. Manoj Sharma
When asked whether Hindalco is paying a higher price,
K.M. Birla said, “When you are acquiring a world leader you will have to pay a
premium”.
4. Hindalco Industries Ltd.
Hindustan Aluminium Company is one of the world's
largest aluminum manufacturing companies and is a
subsidiary of the Aditya Birla Group. It employs
13,675 people and is listed on Forbes 2000. A
metals powerhouse with a turnover of US$14 billion,
Hindalco is one of the world's largest aluminium
rolling companies and one of the biggest producers
of primary aluminium in Asia.
The Hindustan Aluminum Corporation Limited was
established in 1958 by the Aditya Birla Group. In
1962 the company began production in Renukoot in
Uttar Pradesh. In 1989 the company was
restructured and renamed Hindalco.
It was the first company to surpass 0.5 mT of
production in a fiscal year. Its major products include
rolled aluminium sheets, aluminium foil and refined
aluminium.
On February 11, 2007, the company entered into an
agreement to acquire the Canadian company
Novelis for US$6 billion, making the combined entity
the world's largest rolled-aluminium producer.
5. Novelis Inc.
Novelis Inc. is a global aluminum company
headquartered in Atlanta, Georgia, started
incorporated in 2005 as a spin-off from Canadian
mining and aluminum manufacturer, Alcan Inc.
Novelis is the world’s largest producer of rolled
aluminum sheet, with operations spanning 11
countries and nearly 11,000 employees.
The company serves customers in sectors
including beverage cans, automotive, consumer
electronics, construction, foil and packaging.
Demand for aluminum is increasing with the
continued development of emerging nations,
urbanization, and the increasing substitution of
aluminum for other materials, making expansion a
key consideration. The company is investing $100
million in its first manufacturing facility in China set
to open in 2014. In response to global demand for
aluminum sheet for automotive, electronics and
beverage cans, the company has announced
capital investments including a $400 million
expansion in Asia, a $300 million expansion in
Brazil and $200 million expansion in North
America.
6.
7.
8. Production of Aluminum in India
Production Capacity of Hindalco vis-à-vis
Novelis2005 (in tonnes) 2006 (in tonnes)
Hindalco 190,581 211,088
Novelis 2,873,000 2,960,000
Figures pertain to financial year end
Company
Product/Raw
Material Units
March
2005 March 2006
Bharat Aluminium Co. Ltd.
Aluminium Ingot,
Billet, Alloys, Slab, Bus-Bar „000 tonnes 8.61 46.46
Hindalco Industries Ltd.
Aluminium
Metal/Ingots
„000 tonnes 409.07 429.14
Hiren Aluminium Ltd. Aluminium Rods „000 tonnes 23.30 35.4
Madras Aluminium Co. Ltd.
Primary Metal
(Ingots, Billets & Alloys) „000 tonnes 2.97 2.54
National Aluminium Co. Ltd. Aluminium Ingots „000 tonnes 146.32 163.65
9. SALES AND MARKET SHARE OF DIFFERENT
ALUMINIUM COMPANIES IN INDIA
Sales figures are in Rs. crore & pertain to financial year end
Company
March 2005 March 2006
Sales
Market Share
(%)
Sales
Market Share
(%)
Bharat Aluminium Co. Ltd. 1244.89 7 2161.07 10
Hindalco Industries Ltd. 10815.59 62 12772.55 59
Hiren Aluminium Ltd. 256.27 1 446.68 2
Madras Aluminium Co. Ltd. 358.24 2 433.62 2
National Aluminium Co. Ltd. 4696.20 27 5545.53 26
Century Aluminium Co. Ltd 245.01 1 297.31 1
10. Financial Health of Hindalco
0.00
5.00
10.00
15.00
20.00
25.00
30.00
2004-05 2005-06 2006-07
D/E
ROE
Current Ratio
EPS
2004-05 2005-06 2006-07
D/E 0.64 0.67 0.66
ROE 16.79 16.85 20.96
Current Ratio 1.77 2.01 1.93
EPS 13.03 16.02 26.73
11. Financial Health of Novelis
2004 2005 2006
D/E 4.41 6.00 11.08
ROE 0.09 0.19 -1.41
Current Ratio 1.44 1.67 1.38
EPS 0.10 0.21 -1.41
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
2004 2005 2006
D/E
Current Ratio
ROE
EPS
12. Is It a Merger or an Acquisition?
A merger is a combination of two or more corporations in which only one corporation survives
and the merged corporations go out of business.
Under AS-14, if all of the following conditions are satisfied, then this would be a considered a
merger-
• Equity shareholders holding at least 90% of equity share capital should agree to become
shareholder of the company.
• Such shareholders should be paid equity shares only and cash to settle fractions.
• All assets and liabilities should be taken over by new company
• Such assets and liabilities should be taken at book value
• New business should carry on some old business of old company
However, since this deal did not involve any payment in equity shares to the shareholders of
Novelis, to be swapped for shares for Hindalco, and instead it was an all-cash deal structure,
this exercise cannot be said to be a merger.
This exercise was an acquisition of Novelis by Hindalco, where a company(Hindalco) buys
most, if not all, of the target company's (Novelis) ownership stakes in order to assume control
of the target firm. Like in most acquisition deals, it was paid for in cash.
14. DEAL STRUCTURE
It was an all-cash deal(hence, no Exchange
Ratio).
Hindlaco’s AV Metals had acquired all of the
Novelis’ outstanding 75,415,536 common
shares at a price of US $44.93 per share
Thus, Novelis equity was acquired for a sum
of $3.6 billion against a book value of $195
million(= $0.195 billion).
15. Out of $3.6 billion, $2.85 billion was
raised by borrowing, $300 million as
debt from group companies and $450
million from cash reserves.
The other leg of the transaction entailed
paying a debt of $2.4 billion which
existed in the B/S of Novelis. For this,
Hindalco’s Dutch subsidiary, AV
Minerals, raised bridge loan of $2.13
billion and $900 million.
16. What premium did Hindalco pay?
Deal Price* BV/share EPS MPS(25Jan,07)
Novelis $44.93 $2.6 ($3.71) $30
DP/EBITDA DP/EBIT DP/E
Novelis 11.4 20.7 53.4
**Figures are based on financial data at the end of year 2005.
**
* Effective date of deal- 15th May, 2007
17. Sources of Funding
Sl. No. Source US $million
1 ABN AMRO 384.64
2 Bank of America 280.63
3 UBS (Singapore Branch) 280.00
4 Bank of India 185.53
5 ICICI Bank 180.26
6 Mizuho Corporate Bank 180.26
7 Deutsche Bank (Singapore Branch) 178.16
8 Citibank (Bahrain Branch) 175.00
9 Standard Chartered Bank 175.00
10 Sumitomo Mitsui Banking Corp 175.00
11 State Bank of India 170.00
12 Bank of Tokyo-Mitsubishi UFJ 150.00
13 BNP Paribas 135.53
14 HSBC 125.00
15 Rabobank 105.26
16 Calyon 100.00
17 Commonwealth Bank of Australia (Singapore Branch) 50.00
Total 3,030.27
19. Post-Acquisition Strategic
Benefits to Hindalco & Novelis
This acquisition of Novelis by Hindalco established the latter as a global integrated
aluminium producer with low-cost alumina and aluminium production facilities combined
with high -end aluminium rolled product capabilities. Hindalco emerged as the leading
rolled aluminium products maker and the fifth -largest integrated aluminium manufacturer
in the world. Acquiring Novelis also provided Hindalco ready access to its existing
customers such as General Motors Corp., Aston Martin, Coca-Cola Co., etc.
Novelis gave Hindalco an entry into the down-stream value addition business of rolled
aluminium products. Earlier, Hindalco was limited to the upstream business of mining
bauxite and converting it into alumina, and then smelting it into aluminium. Also, Novelis
had built a unique fusion technology that helped in increasing the formability of
aluminium and products like sheet metal. The low weight –to-strength ratio had many
applications in the auto industry, which was now advantageous to Hindalco.
About 35 mT of aluminium was consumed in 2006. About 40% of this was rolled
aluminium products, where Hindalco had no presence. However, Novelis had a 19%
world share, which was now acquired by Hindalco. It would have costed Hindalco US
$12 billion to build assets that match Novelis’ s 29 plants in 4 continents with current
production of 3.3 mT in 10 years, if Hindalco had taken the organic growth route.
Thus Novelis acquisition helped Hindalco gain quick access to new technologies and
large production capacities without having made the efforts towards time-consuming
R&D.
20. Post-Acquisition Strategic
Benefits to Hindalco & Novelis
Novelis formed a natural hedge for Hindalco. The latter was
charging a higher profit margin when aluminium prices were high
on the LME and vice-versa. Thus, Hindalco’s rise and fall in profits
depended directly on the aluminium prices on the LME. This was
not the case with the aluminium rolling business of Novelis, which
usually has a constant margin. After its loss-making can contracts
expired in 2010, the Novelis business model and profitability
became LME independent and a steady cash flow was earned.
Novelis was the global leader in aluminum rolled products and
especially, aluminum can recycling, with a global market share of
about 19 %. The deal gave Hindalco a strong presence in the
business of aluminium recycling as it is infinitely recyclable and
requires only 5% of the energy needed to produce primary
aluminium.
21. Post-Acquisition Strategic
Challenges to Hindalco & Novelis
Novelis profitability was significantly affected by the
inability to pass through metal price increases due to
metal price ceilings in certain of the company’s sales
contracts till 2009. But by January 2010, all the sales
contracts got expired and profitability will increase
substantially from then onwards, due to new contracts
The debt component of Novelis stood at US $2.4 billion
and additional US $2.8 billion was taken by Hindalco to
finance the deal. This will put tremendous pressure on
profitability due to high interest burden, in light of
Hindalco’s expansion plans consisting of various
Brownfield & Greenfield projects costing Rs. 25,000 crore.
22. Post-Acquisition Performance of
Hindalco
2006-07 2007-08 2008-09 2009-10
D/E Ratio 0.66 1.87 1.8 1.11
EPS 26.73 17.04 3.21 22.17
ROE 20.96 13.76 3.07 18.22
Current Ratio 1.93 2.07 2.9 1.44
0
5
10
15
20
25
30
2006-07 2007-08 2008-09 2009-10
D/E Ratio
EPS
ROE
Current Ratio