HINDALCOS ACQUISITION OF
NOVELIS : Making of a giant
Group 2:
Karthik Kannan - 62
Samridhi Kalita- 119
Venkatesh - 163
R Aswin - 175
Case Analysis
Hindalco analysis:
India- based Hindalco Industries ltd with annual revenue of US $2.6
billion, subsidiary of Aditya Birla Vikram Birla group of companies
Acquisition led strategy (2000- Indal , 2003- Nifty copper mine, 2006JV with Almex)
Increased acceptance of high grade aluminium contract on LME
Novelis analysis:
Novelis was the global leader in aluminium rolled products in 2007
Producing 19 % of the world's flat-rolled aluminum products
World leader in aluminium recycling of beverage cans
Aluminium industry analysis:
Primary - High capital costs, restricted access to technology
Secondary low entry barriers, high input cost
Customers Automotive, Electrical, construction & Packaging.
Type of Merger: Horizontal
Strategic Rationale for the deal
The acquisition of Novelis took Hindalco onto the
global stage
Made Hindalco the worlds largest aluminium rolling
company and one of the biggest producers of
primary aluminium in Asia.
Hindalco would be able to produce the low cost
aluminum from its plants in India and export it to
plants of Novelis where it could be converted to
Value-added products
To move up the value chain and start producing
value-added products and hence leverage the low
cost advantage it had in aluminum production
1. Was the merger a good decision? Should it have
happened at all?
Yes it was a good decision . The joint entity was
expected to become insulated from the fluctuation of
LME aluminum prices
The deal would give Hindalco a strong presence in
recycling of aluminum business
Novelis was processing around 3 million tonnes of
aluminium a year. It was believed that the deal
would catapult Hindalco's flat rolled product capacity
from 0.2 million ton to 3.2 million ton per annum.
Novelis deal would give Hindalco access not only to
high-end products but also to superior technology
Did Hindalco pay a fair price for Novelis?
All cash transaction.
Deal value of Novelis is approximately $6.0 billion, including the
debt of $2.4 billion with the debt to equity ratio of 7.23:1
100% of equity at $44.93 per share (16.6% premium) was
valued at US $3.6 billion.
Hindalco had refinanced the total borrowings of $2.4 billion from
Novelis.
Hindalcos Interest cost for $2.85 billion of debt is between US
$150-$160 milllion.( one-third of net profit 2500 cr in 2006-2007)
According to the financial analysis, the fair price for the deal was
found to be $5.1 billion
Enterprise value of Novelis = MV of Equity at $38.53 Per share+
MV of debt cash & cash equivalents = $2.9+$2.4-$0.13=$5.1
billion
Thus, the deal is overvalued, though the goodwill of Novelis is
increased from $0.24 billion in 2007 to $1.9 billion in 2008.
Did Hindalco pay a fair price for Novelis?
Birlas are paying too high a price for a company that incurred a
loss of US $170 million for the nine months ended 30
September 2006.
The immediate effect of the merger is that Hindalco would
achieve its target of doubling its turnover to $ 20 billion three
years in advance. Novelis fits well in the long term strategy of
Hindalco.
At a total enterprise value of US $ 6 billion, Novelis is nearly 50%
larger than Hindalcos current market capitalization.
Value Addition for Hindalco
Economic
Technolog
ical
Markets
Products
Value Addition for Hindalco
Economies of Scale.
Reduction in uncertainty from fluctuating Aluminum prices in
the LME
Improved product quality due to better technology from
Novelis
Hindalco will get a strong Global footprint and emerge as the
largest rolled Aluminum products maker
The deal would give Hindalco a strong presence in recycling of
aluminium & rolling sheet business.
Access to new set of customers Coca Cola, Budweiser, Ford,
GM, Audi, BMW
Though the share price of Hindalco decreased drastically to
Rs.120- Rs.130 after acquisition, it will increase in future
because of goodwill from Novelis.
The replacement value of Novelis was US $12 billion, so
considering the time required and replacement value; the
deal was worth for Hindalco.
Value Addition for Novelis
Suffered a huge loss of $170 mn in 2006 September.
Fixed price contracts hampering its profit margin
Unfavourable currency movements
Higher transportation and energy costs
A premium of 16.6% being offered by Hindalco for its shares,
The goodwill of the company has increased 8 times from
$0.24 billion in 2007 to $1.9 billion in 2008.
Premium amount = $0.9 billion.
HAD HINDALCO ERODED THE VALUE TO ITS
SHAREHOLDERS?
Though acquisition increased Hindalcos net sales by 213%
over the previous years , increased debt could erode
profitability
Adverse changes in currency exchange rates could negatively
affect the financial results and the competitiveness of
companys aluminium rolled products relative to other
materials.
Share price fell ( from as high as Rs. 199 to Rs. 120-130 )
It would take Hindalco atleast 10 years to create asset
capability on the downstream front
The last of Noveliss fixed price contracts would end by 2010
The deal would put Hindalco amongst the top aluminium
producers in the world
Thus the deal would create advantages for Hindalco & its
shareholders.
Thank You
