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!