The Hindu Business Line : Hindalco to acquire US-based Novelis in $6-b all-cash deal

`LANDMARK TRANSACTION': Mr Kumar Mangalam Birla, Chairman, Aditya Birla Group, and Mr D. Bhattacharya, MD, Hindalco, addressing a press conference in Mumbai on Sunday. — Shashi Ashiwal

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Mumbai Feb 11 Hindalco Industries has agreed to acquire US-based aluminum products maker Novelis Inc for $6 billion in an all-cash deal.

The deal was announced at a news conference on Sunday by Mr Kumar Mangalam Birla, Chairman of the AV Birla group.

The deal, which reiterates corporate India's new appetite for international acquisitions, comes barely a fortnight after the Tata-Corus deal, which made Mr Ratan Tata the toast of Indian industry.

"It is a significant event for Hindalco and the AV Birla Group," said Mr Birla.

This almost doubles Hindalco's turnover in one fell swoop, he said, adding that it catapults the Group right to the threshold of the Fortune 500 group of companies.

The acquisition is expected to be completed by the second quarter of the current calendar, subject to regulatory approvals and other formalities.

Hindalco will pay $44.93 in cash for each outstanding common share of Novelis, roughly 15 per cent premium to the market price.

The company has `ring-fenced' itself to handle a possible "superior" counterbid, said Mr Debu Bhattacharya, Managing Director of Hindalco.

"Theoretically there is always room for another bid, it is always possible," said Mr Birla. "But we don't expect that to happen."

The party that makes a "superior" counterbid has to pay around $100 million to Hindalco as "break-fee," making it a trifle expensive.

Assuming that the party has to pay $2-3 more per share to better Hindalco's deal, the net increase with the break-fee could mean up to $5 more per share than our bid, said Mr Bhattacharya.

The agreement requires 66.66 per cent of Novelis shareholders present and voting to tender their shares. Otherwise, Hindalco will walk away. If this condition is satisfied, the remaining one-third of shareholders will be "squeezed out," (will have to sell to Hindalco).

Novelis is a widely held company, its shareholders being largely hedge funds and institutional investors. The company operates in 11 countries, has 36 operating units and 12,500 employees.

Its revenues stood at $8.5 billion in 2005. Novelis posted net loss of $102 million during the third quarter of 2006 (the calendar year is the company's fiscal year).

DEAL FINANCING

The deal would be financed through recourse debt of $2.8 billion. Hindalco's treasury would contribute $450 million, while SL Iron Ore Mining, another group company, would contribute $300 million as debt.

Novelis already carries $2.4 billion of debt, of which $1 billion comprises term loans and $1.4 billion high-yield loans.

"The current debt-equity ratio of Hindalco, at 0.2-0.3, will definitely go up," said Mr Birla. "But we will keep a watch on the commodities and finance markets to ensure that the debt levels are comfortable even after this transaction."

This will be despite Hindalco's giant capital expenditure plan for its greenfield and brownfield expansions.

Two special purpose vehicles will be set up for the purpose. The first, AV Metals, will be based in Canada, will raise the recourse finance and actually acquire Novelis. The other will handle the non-recourse finance.

INCREASED INTERNATIONALISATION

For the AV Birla Group, the acquisition marks its increased internationalisation.

Post-acquisition, over 50 per cent of the group's business could come from operations outside India, which is currently at 30 per cent.

Also, 20 per cent of the group's total workforce would also be based outside India, said Mr Birla.

GROUP TURNOVER

Hindalco's group turnover for 2006-07 would be $11.8 billion.

Novelis is the world leader in the aluminium flat rolled products (FRP) business, of which it has 19 per cent marketshare globally.

FRP itself accounts for 40 per cent of the aluminium market, said Mr Bhattacharya.

Hindalco is among the lowest cost producers of aluminium in the world, but it gains and falls according to LME price movements.

The acquisition of this downstream business would help Hindalco insulate itself from the volatility of international commodity prices.

IMPACT ON PROFITABILITY

Novelis has entered into certain `can body' (material for beverage cans) contracts that do not allow it to pass on commodity price rises to those customers. These contracts expire in January 2010, but must live their life, said Mr Bhattacharya.

This will impact the profitability of the Hindalco Group (consolidated).

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