Novelis sharpens Asia focus, buys out Korean firm

Novelis Korea, a subsidiary of Novelis, has decided to raise its stake to a controlling position in South Korea-based Taihan Electric Wire Co (TEC).

The company recently announced that it has reached an agreement with TEC and other shareholders of its subsidiary to purchase 31.2% of the outstanding shares in the Korean corporation for approximately $350 million in an all-cash transaction. This would take its ownership to 99% of the outstanding shares in the Korean company. The sale is expected to close by December 31, 2011.

“Our decision to purchase the remaining minority interest in Novelis Korea represents another key step in Novelis’ strategy to prepare for future growth in Asia,” said Phil Martens, president and chief executive officer of Novelis, during an interaction with reporters.

He sees Asia as the largest and fastest growing region for aluminium-rolled products, with an expected annual growth rate of 8% for the next five years. The current deal will enable Novelis to strengthen its position in the beverage can, electronics and automobile markets.

Experts say the move is centred on two main aspects - one, to give minority shareholders of Novelis Korea an exit route without listing the shares on the stock exchange and, second, a stronger and a diversified position in the South Korean market. TEC is a leading manufacturer of domestic cables and optical fibre cables and also deals in copper rods and stainless steel.

“The Korean business accounted for 19% of shipment, 18% of revenue and 21% of EBIT of Novelis for FY2011,” said Pritesh Vinay and Kunal Singh of Goldman Sachs, in a recent report.

In fact, South Korea is big on its growth strategy where the company is currently expanding its plant capacity by almost 50% to one million tonnes per annum of aluminium rolling capacity at an investment of $400 million. The expansion will include construction of a state-of-the-art recycling centre for aluminium beverage cans and a casting operation with annual production capacity in excess of 260,000 metric tonnes of sheet ingot.

The company hit the ground running for its expansion work in the last quarter and the plant is expected to be operational by 2013-end.

At a recent conference call, the company said Asia is expected to post a robust growth in flat products over the next few years, especially driven by cans and automobiles. In fact, the company is bullish on the growing use of aluminium for automobiles as a light weight alternative for steel.

Shortly after its quarterly results were announced, Martens said the long-term outlook for the automobile industry looks good. “We anticipate that between 2011 and 2016, the demand for aluminium from the automotive industry will grow at a rate of 25%,” he said, and added that a substantial part of it will also come from Asia.

He added that this is in contrast to the expected demand from electronics at 6% and beverage cans at 4-5%. Vinay and Singh, however, throw a bit of caution here and suggested  that going forward the only possible risks could be volatile LME prices and delayed project execution.