The Hindu Business Line : Little incentive to keep Indal separate

EVEN as late as in early July, the Vice-Chairman of Indian Aluminium Company (Indal) had ruled out the possibility of a merger between Hindalco Industries and Indal in the immediate future. He, however, came up with a tantalising caveat that "anything could happen in the corporate world".

That caveat was exercised on Monday when the Board of Directors of Hindalco met to consider a court-sanctioned scheme of arrangement to bring all businesses of Indal, save that of foils, under the Hindalco banner. It is hard to be categorical about the factors that forced Hindalco to change tack, but a few inferences can be drawn from the recent developments.

Nalco disinvestment on the backburner: As prospects of disinvestment of the Government's equity stake in National Aluminium (Nalco) are fading, there appears to be little incentive for Hindalco to keep the operations of Indal as a separate company. As Indal is already a 96.7 per cent subsidiary of Hindalco, the merger, which was only a formality, is finally being considered.

Downstream aluminium gathering pace: As a downstream major, with a strong presence in rolled products and extrusions, Indal turned in a strong performance for the first quarter ended June 30, 2004. With import tariffs on aluminium at 15 per cent, Hindalco will aim to leverage their combined strength in the downstream segment.

Meanwhile, the reduction in import tariffs on copper by 10 per cent and sluggish domestic offtake are likely to affect the financials of copper business. The segmental profit before interest and tax of the copper business at 5 per cent is considerably lower than 34 per cent for aluminium. Obviously, the return on capital employed will also reflect these lower profit metrics. Since the copper fundamentals may not stage a strong comeback during the year, the merger of Indal (subject to court approvals) with Hindalco may provide strong support to Hindalco's bottomline in 2004-05 and beyond.

Twist in the tale

THERE'S an interesting twist in the tale to Hindalco's decision to demerge all the businesses of Indal, save its foil business, and merge it with itself under a court-sanctioned scheme.

Under the scheme, every public shareholder who holds seven shares in Indal will get one share of Hindalco.

In the last open offer made by Hindalco, the public shareholders of Indal had the option of tendering at a price of Rs 120. Since this exit option will be available till February 2005, let us assume this price to be the starting point for valuing Indal's share. Based on the 7:1 share swap, the value of seven shares held by a shareholder in Indal will be Rs 840. As Hindalco's share price is trading at Rs 1,128, the difference of nearly Rs 290 is the sweetener being offered to the shareholder of Indal to approve the scheme in the shareholder meeting, which precedes the court-sanctioned scheme.

We are not bringing the foil business (part of Annapurna Foils) acquired earlier by Indal into this equation as the Indal stock may continue to remain illiquid even after this demerger goes through. Hence, there is no point in assigning any value to the proposed reduction in the Rs 10 per share to Rs 2 for the remaining foil business of Indal.

More Stories on : Aluminium | Mergers & Acquisitions

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
FLAG withdraws plaint against VSNL's US foray

`Low-cost airlines no threat to Rlys'

Competition Act changes may dilute panel's powers

More steel majors cut prices

What led to the rollback

Lower prices to stay till March 2005: Tata Steel

Hindalco finalises merger of Indal units with itself

Little incentive to keep Indal separate

Market stabilisation scheme turning costlier

`Borrowings well on schedule'

Steel majors' move fails to cut ice in bourses

Truckers' strike to continue