Birla acquires Novelis; hits the Fortune 500 ahead of schedule

MUMBAI: If the Tatas pulled off a multi-billion-dollar acquisition, can the Birlas be far behind?

 

Hindalco Industries, a flagship company of the Aditya Birla group, on Sunday announced an agreement to acquire Novelis Inc, the largest flat-rolled aluminium maker in the world, for $6 billion (Rs 26,400 crore), which includes $2.4 billion of debt on the books.

 

The all-cash deal will involve payment of $3.55 billion in cash to Novelis shareholders, at $44.93 a share. The Novelis share closed on Friday at $38.54 on the New York Stock Exchange.

 

Announcing the deal, Kumar Mangalam Birla, chairman of the Aditya Birla group, the fourth-largest Indian business group by sales turnover ($12 billion at last count), said: “The deal will catapult the group to the Fortune 500 list three years ahead of what we had targeted.” Birla had spoken of his Fortune 500 ambitions in DNA Money’s inaugural issue on July 30, 2005.

 

The deal, when consummated in the second quarter this year, will also catapult Hindalco to No 5 rank globally as an integrated aluminium player. On the Birla radar for some time now, Novelis Inc is the world’s largest flat rolled aluminum maker, and will thus make Hindalco No 1 by far in this category. Novelis has been a loss-making company waiting to be acquired. Its woes stem from the fact that it has no captive source of bauxite, which forces it to buy alumina, the main raw material, from the spot markets.

 

In the nine months to September, 2006, Novelis had reported a loss of $170 million largely because it is locked into fixed-price contracts with many customers that run upto 2011. Birla will have to carry the can till then.

 

The story line for the Birla deal almost runs parallel to what Tata Steel’s logic was in acquiring Corus Group for $12 billion.

 

It will give Hindalco a quick entry into value-added aluminum products that include sheet metal for cars and cans for beverages. “We need technology. We need to move into the high end of the aluminum market”, says Debu Bhattacharya, managing director of Hindalco.

 

Hindalco, like Tata Steel, is also in the midst of a gargantuan greenfield capacity expansion plan that’ll cost it a whopping sum of Rs 25,000 crore.

 

The young scion of the Birla family, 39, who’s known for his tenacity when pursuing an acquisition, brought along his mother, Rajashree, also the vice-chairman of his group, and his wife Neerja to the press conference.

 

“We have been conservative with our business and we’ll remain very competitive”, says Birla, who admitted that Hindalco will face the pangs of acquiring Novelis for a couple of more years. While $ 2.8 billion of the funds required will come from recourse financing, the balance of $750 million will come from Hindalco and group company Essel Iron Ore Mining.

 

The Birlas were confident that a repeat of Corus, where the initial Tata bid faced a challenge from CSN of Brazil, is unlikely. “We have secured the Novelis board’s support on Hindalco’s offer of $44.93 a share.” The price represents a premium of about 17% over the stock’s closing price on Friday last week.”

 

The Birlas are certain that they have locked in the deal, thanks to the shrewd manner in which they have structured it. Any interloper walking in late to place a bid will have to pay US $100 million (Rs 441 crore) as breakoff fee to the Birlas. The Birlas have also put in a clause in the agreement that any new bid has be at least $3-4 higher than what they have promised to pay. “I can bet that we’ll get it,” says Debu Bhattacharya.

 

 

Hindalco, India’s largest non-ferrous metals company with a 60% domestic market share, is buying Novelis, the world’s leading producer of rolled aluminium products, for $6 billion (over Rs 26,000 crore), including outstanding debt. This will be the second-largest global acquisition by an Indian company, following the recent Tata deal to buy Corus for $12.16 billion.

 

 

The deal will create the world’s largest aluminium rolling group, providing cost synergies with Hindalco, which is one of the biggest producers of primary aluminium in Asia. The combo will create an integrated aluminium player with low-cost metal sourcing from India and access to some of Novelis’ biggest customers. Novelis made a loss of
$170 million in the nine months to September, 2006, due to high metal prices.

 

 

Novelis, which could report a turnover of around $10 billion in 2006 (nine-month figures: $7.4 billion), was incorporated two years ago to run Alcan’s rolled products businesses. It is a global leader with a 19% market share. Its clients include General Motors, Coca-Cola, and Kodak.  It operates in four continents - North & South America, Asia and Europe — with 34 operating facilities in 11 countries and 12,500 employees.

 

 

Under the agreement, Novelis shareholders will receive $44.93 in cash for each outstanding common share. This is a 17% premium over Novelis’ closing price on the New York Stock Exchange last Friday.  The boards of Novelis and Hindalco have approved the deal, but two-thirds of shareholders have to nod acceptance. Once regulatory approvals are given under Canadian law, the deal can be sealed by June.

 

 

By buying a company two-and-a-half times its size, Hindalco will have to work on delivering the cost synergies quickly. Novelis carries a huge debt burden of $2.4 billion on its books, and its losses are the result of fixed-price contracts with customers at a time when aluminium prices have been rising. Losses can be blotted out only if aluminium prices start falling. Hindalco’s profits are robust enough to carry the day.

 

 

The $6 billion imputed value of Novelis includes a  cash payment worth $3.55 billion to Novelies’ shareholders  and debt worth $2.4 billion. The cash is being substantially borrowed from banks ($2.8 billion) through a device called “recourse financing”, with the balance coming from group  companies Hindalco ($450 million), and Essel Iron Ore Mining ($300 million), another Aditya Birla company.