Hindalco’s debt to soar on Aleris deal

Suresh P Iyengar Mumbai | Updated on April 15, 2020 Published on April 15, 2020

Kumar Mangalam Birla, Chairman, Hindalco Industries   -  BUSINESS LINE

But the buyout will generate synergy benefit of $150 m, help expand its global footprint

By closing the long-awaited $2.8-billion deal to buyout Aleris, Hindalco Industries has yet again proved that it is not averse to taking calculated risk despite the economic uncertainty unleashed by Covid-19 and sharp fall in aluminium demand across the globe.

The deal, which is being executed by Hindalco’s US subsidiary Novelis, is expected to push the Aditya Birla group company’s consolidated debt up to about ₹53,508 crore this fiscal-end, against ₹38,314 crore in FY20.

The net debt is expected to be at an elevated level till Novelis divests Aleris’ auto plant at Lewisport in the US, which in the current situation could take 9-12 months.

The net debt/EBITDA may increase to 4.4 times this fiscal as earnings are expected to be under pressure due to the Covid-19 pandemic.

The company may face problems of high debt if the global demand recovery takes longer than a quarter.

Novelis has received regulatory approval to divest one of Aleris-owned rolling mill in Duffel to Liberty House. Further, it has to find a suitor for Aleris’ Lewisport plant.

The benefit of the acquisition is significantly diluted without the auto assets in the US but the company would get an exposure to aerospace which faces a bleak outlook in the medium-term, said Sumangal Nevatia, research analyst at Kotak Institutional Equity Research.

Currently, Covid-led lockdowns in the US and Europe have impacted the auto finishing lines of both Novelis and Aleris.

In addition to losing out on the valuable auto asset in the deal, Hindalco has to pay a higher price of $2.8 billion to close the deal, against $2.58 billion estimated in 2018.

The higher price is due to an increase in Aleris’ debt since the initial acquisition was announced. The company had to increase its working capital to support the ramp up operations. Moreover, Aleris’ earnings was much better on the back of strong performance of its US business.

However, the acquisition of Aleris will make Hindalco one of the world's largest aluminium company with a global footprint of 49 manufacturing facilities in key markets of North America, Europe and Asia.

The deal would generate synergy benefit of $150 million and create a strong financial profile.

Published on April 15, 2020

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