Post on 21-Jun-2015
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HINDALCO’S Acquisition of Novelis
The Making of a Giant
AGENDAIntroduction
The Deal
Motivation behind it
Benefits
Challenges faced
Current status
Questions & Answers
Introduction: Company Profile
NOVELIS
• Global aluminum co. headquartered in Atlanta formed in 2005
• By 2007, it became the world leader in aluminum rolling
• Its operations extend in 11 countries with over 12,700 employees
• Focus was on helping the customers perform and transforming new ideas into practical product solutions
• Vision was to make the world a lighter, brighter and better place
• World leader in the recycling of used aluminum beverage cans
HINDALCO
• Hindustan Aluminum Company is one of the largest aluminum manufacturers in the world
• Incorporated into the Aditya Birla Group in 1958
• Headquartered in Mumbai
• Annual sales of US$ 15 billion and employs around 20,000 people
• Chairman: Kumar Mangalam Birla
• On 11 February 2007, the company entered into an agreement to acquire the Canadian company Novelis for US$6 billion
• The combined entity is the world's largest rolled-aluminum producer
HINDALCO’S ACQUISITIONS
1999 74.6% stake in
INDAL
2002Indo Gulf
Corporation’s copper
business
2003Nifty Copper
Mine
2004INDAL
merged with HINDALCO
2006JV with Almex
USA
2006JV with Essar
Aluminum Value Chain
Bauxite Mining
Aluminum Refining
Aluminum Smelting
Fabrication
Motivation Behind the Deal
HINDALCO
• Followed an acquisition-led strategy along with forward & backward integration
• Wanted to increase its global presence
• To strengthen its downstream capabilities
• To fetch economies of scale
• To leg-up its technology
• To fetch the contracts of Novelis
NOVELIS
• It was the world leader in aluminum rolling
• It was the supplier of the highest quality aluminum sheet and foils
• World leader in recycling aluminum cans
• Yet it was incurring losses
• Unable to implement the escalation clause (fixed-price contracts)
• The output of HINDALCO was the input of Novelis; aluminum acting as a link
• To implement its vision effectively
The DEAL (MAY-2007)
• It was an all-cash transaction valued at $6 billion ($2.4billion of debt)
The deal consisted of 2 parts:
1. HINDALCO bought 100% of Novelis’ equity at $44.93 per share (US$3.6.bn)
• It borrowed $2.85 bn (interest expense of INR 800 cr)
• $300 mn was raised from Essel Mining (Aditya Birla Group)
• $450 mn from their cash reserves
2. $2.4 bn debt on Novelis’ balance sheet had to be cleared by HINDALCO through refinancing
Key Benefits Technical & administrative economies of scale
Concentric benefits
Reduction of uncertainty
Improvement in quality
Price discrimination through vertical integration
Key Challenges
• Quick completion: Approvals from government agencies, company boards, lenders and courts
• Integration: Integration of companies with diverse cultures, nationalities across various levels and functions
• Retaining cutting edge: Spirit and capability of innovation, keycustomer relationships, people skills to be expanded across greater HINDALCO
• Identifying and realising synergies: IT and risk management skills, jointly realizing downstream vision, and international marketing
• Improving Novelis’ financial performance: focus on costs, operations, pricing and working capital
Other Foreseen Challenges
• This acquisition would expose HINDALCO to weaker balance sheet
• Along with the tripling of revenues, the debt would also pile up for HINDALCO which would erode its profitability
• Adverse changes in currency exchange rates could negatively affect the financial results
• Due to its highly leveraged position, HINDALCO’s future expansion plans may get affected
CURRENT SCENARIO
• HINDALCO has gained access to the aluminum market globally
• It gained access to Novelis’ sophisticated technology which would have taken 10 years to come up with
• An industry leader in aluminium and copper
• It is a metals powerhouse present in two of the fastest growing metal segments: aluminium and copper, with
• It has global footprints in 13 countries and with a consolidated turnover of USD 14.8 billion (Rs. 80,193 crore)
• As on 30 June 2013, the promoters Aditya Birla Group held around 32% equity shares in Hindalco
Source: www.hindalco.com, wikipedia
Questions & Answers
Was the merger a good decision?This merger was a good decision as by doing so, it could reap the following
benefits:
• It gained access to large international contracts because of Novelis’ credibility and brand value.
• It reaped the benefits of the economies of scale by reduction of cost and time spent in procuring raw materials
• It could increase in size and market share by spreading its global footprint in 12 countries
• It became the 5th largest aluminum manufacturer and the biggest rolled aluminum products maker in the world
• It could now be protected from the risks of fluctuations in aluminum prices on the LME (London Metal Exchange)
• Access to sophisticated technology leading to high quality of final products
• Vertical integration enabled the entity to get high prices for its products
• It could save a considerable amount on overheads
VALUE ADDITION
NOVELIS
• It reported a net income of USD 25 million for the first quarter of 2009
• It reported a pre-tax income of $62 million on sales of $3,103 million for the same period
• Thus, it indicated an improvement of $176 million in the pre-tax income for the next year
• Reduction in $15 million in selling, general expenses
• Interest expense lowered by $11 million
• Product mix improvements
HINDALCO
• Its net sales increased by 213%
• Access to advanced technology
• Increased global footprint
• Benefits of vertical integration
• Increased clientele
• Broader market segment to cater to
• Increase in shareholder’s value
Major Changes in the Stock Market
Stock prices fall just after the deal announcement
Gradual rise in price after deal completion
Fall in stock price after rights issue was
announced in June
HINDALCO
Overall Changes
• Very strong cash flow performance
• Substantial operating improvements
• Novelis Fusion global footprint
• Solid progress on risk management
• Improvements in pricing and portfolio
• Reduction in price ceilings
• Reduction in corporate costs
CHALLENGES FACED
POST-MERGER
• Higher input and operational cost summing up to $48 million increase in cost
• Increase in energy, freight and alloy costs
• Exchange rate mismatch
• Higher tax expenses
• Profits declined by 10.8%
• Fall in the share prices
How did they overcome the challenges?
• Existing management system was not disturbed
• After six months of acquisition, HINDALCO sent deputed just 2 of its own executives to Novelis:1. To institutionalize a risk-management process
2. To improve its global supply chain in the logistics department
• No lay-offs happened while hiring was on hold
• Plain and simple techniques were used to manage the business
• It set up an IT company for Novelis due to the dearth of inexpensive engineers
• It set a target of 7-12 stock turn s a year for Novelis by 2010
• This could free $300 million in working capital
Source: External Research
Thank you!