Hindalco Industries Limited, the Aditya Birla Group metals flagship company, has become the world’s largest value-added aluminium downstream player in the world with a global footprint spanning 49 state-of-the-art manufacturing facilities in North America, Europe and Asia. This feat was achieved after the company’s wholly owned subsidiary Novelis Inc, completed the acquisition of Ohio-based Aleris nearly two years after signing the deal for an enterprise value of $2.8 billion, slightly higher than the initial estimate of $2.58 billion. The deal in indeed a long-term strategic bet, much like Novelis was in 2007, a point which Kumar Mangalam Birla, Chairman of the Aditya Birla Group has underlined.
Aleris will be Hindalco’s second acquisition in the US after Novelis.
Aleris will be Hindalco’s second acquisition in the US after Novelis, which it had bought for $6 billion in 2007. Hindalco’s purchase of Novelis was the second biggest overseas deal by an Indian entity after Tata Steel’s $13 billion acquisition of Corus. Aleris was privately held by private equity firms Apollo Management, Oaktree Capital Management and Sankaty Advisors.
Novelis will acquire Aleris’ 13 plants across North America, Europe and Asia. However, as per anti-trust regulatory conditions, the company will have to divest Aleris’ plants in Lewisport, Kentucky, USA, and Duffel, Belgium. In September last year, the US Department of Justice filed an antitrust lawsuit seeking to block the Aleris purchase by Novelis as it was said to be violating the competition norms in the auto parts industry in North America. However, the company obtained a nod from the antitrust body on the condition that the company will sell Aleris’ aluminium sheets operations in Lewisport, Kentucky. The Group is currently negotiating with Liberty House to close Duffel transaction, subject to China approval. It is also in discussion with the US Department of Justice to define timeline and terms for divestment of Lewisport.
The $2.8-billion deal consists of $775 million for the equity value, $2 billion for the assumption or extinguishment* of Aleris’ current outstanding debt and a $50 million earn-out payment. Aleris’ debt levels have increased since the initial acquisition announcement two years ago due to rise in working capital to support the ramp up of operations. The deal will be funded by a one-year bridge loan, a five-year term loan and equity investment. For Hindalco, the debt burden will rise as the company has to take considerable debt to fund the deal. It would raise Hindalco’s consolidated debt by about Rs 16,500 crore.
*Novelis will have to divest Aleris’ plants in Lewisport (US), and Duffel (Belgium). Aleris’ plant in Duffel will be bought by UK-based Liberty House for $337 million. The divestment amount of Lewisport plant is to be worked out. These two will help Hindalco and Novelis to cut down the acquisition price.
Transaction Financing and Funding
Acquisition shall be done via debt funding by Novelis. $1,110 million 1-year bridge loan at LIBOR +0.95% and $775 million 5-year term loan at LIBOR + 1.75% and the remaining would be from ABL and cash* of close to $900 million which gives a total of $2.8 billion price tag for Aleris.
*Cash includes $400 million proceeds from Novelis senior notes issued in January 2020
The Aleris deal will enable Hindalco to further diversify its metals downstream portfolio into other premium market segments, most notably aerospace. In fact, Aleris has long-term supply contracts with aircraft makers Boeing, Airbus and Bombardier. For Novelis, one of the biggest advantages of the deal will be in aerospace. In fact, a report by Emkay, shows that between 2017 and 2036, aerospace demand is likely to grow by 34,000 aircrafts. However, with coronavirus pandemic grounding all airline services across the world, companies facing humongous losses, and demand for travel likely to remain tepid for the next one to two years, it is unlikely that the demand for new aircrafts will rise much in the next few years
The transaction will make Hindalco a $21-billion entity in terms of revenues, with an employee base of 40,000.
The acquisition will also give Hindalco access to aluminium supply market for the building and construction segments. With the addition of Aleris’ operational assets and workforce, Novelis can more efficiently serve the growing Asia market by integrating complementary assets in the region including recycling, casting, rolling and finishing capabilities.
Table 1: Standalone Financials (Trailing 12 mths ending Dec 19)
|FRP Shipments (kilo tonnes)||3,332||858|
|Revenue ($ millions)||11,575||3,376|
|Adjusted EBITDA ($ millions)||1,446||388|
|Adjusted EBITDA/ton ($)||434||452|
|Net Debt ($ millions)||3,394||1,900|
|Net Debt/Adjusted EBITDA||2.3x||4.9x|
Among the other strategic benefits, the deal will generate are around $150 million in synergies and create a strong financial profile. The deal insulates Hindalco-Novelis from global price volatility and sharpen the company’s focus on the downstream business. With the closure of the acquisition, Novelis will operate under four value streams: Can, Automotive, Aerospace, Specialties, including applications for building, construction, transportation, etc. Till now, beverage industry sales (mainly cans) accounted for 60% of Novelis’ volume, while automotive and specialty end markets accounted for 20% each. With the completion of the acquisition, the volume share will change as aerospace is the major business for Aleris, especially in North America.
The transaction will make Hindalco a $21-billion entity in terms of revenues, with an employee base of 40,000. However, the debt amount is manageable.
Hindalco Industries Limited is the metals flagship company of the Aditya Birla Group. A US$18.7 billion metals powerhouse, Hindalco is the world’s largest aluminium rolling and recycling company, and a major copper player. Hindalco’s global footprint spans 36 manufacturing units across 10 countries. It is also one of Asia’s largest producers of primary aluminium. Its wholly-owned subsidiary Novelis Inc. is the world’s largest producer of aluminium beverage can stock and the largest recycler of used beverage cans. Hindalco’s copper facility in India comprises a world-class copper smelter, downstream facilities, a fertiliser plant and a captive jetty. The copper smelter is among the world’s largest custom smelters at a single location.
As a global leader in innovative products and services and the world’s largest recycler of aluminum, the company partners with customers in the automotive, beverage can and specialties industries to deliver solutions that maximise the benefits of sustainable lightweight aluminum throughout North America, Europe, Asia and South America. Novelis is a subsidiary of Hindalco Industries Limited., Hindalco acquired Atlanta-based company Novelis, a world leader in aluminium rolling and flat-rolled aluminium products, on May 15, 2007. This acquisition was done to gain immediate scale and a global footprint. Acquiring Novelis gave Hindalco access to sheet mills that supplied to can manufacturers and auto companies.
Aleris is a privately held, global leader in aluminum rolled products serving diverse industries including aerospace, automotive, building and construction, commercial transportation and industrial manufacturing. Headquartered in Cleveland, Ohio, Aleris operates production facilities in North America, Europe and Asia. In 2016, the private equity owners of Aleris, Oaktree Capital, Apollo and Sankaty Advisors entered into a contract with Chinese aluminium billionaire Liu Zhongtain for $2.3 billion. However, the deal fell through because of regulatory and national security issues involving a Chinese company.
The closure of the landmark deal is indeed beneficial for Novelis and its ultimate holding company due to better market penetration and product mix. However, it is done at a time when the metals and mining sector is undergoing a severe downturn because of lower demand globally particularly of airplanes due to the Covid-19 outbreak. No doubt the integration of Aleris into Novelis should be done at the earliest, excluding Lewisport and Duffel and Novelis. HINDALCO should concentrate to deleverage at the earliest to minimize its finance cost by raising its risk capital or refinancing loans with cheaper interest as the largest Indian company is planning by making huge right issue of above Rs 50000 crores. Multiple Indian corporate should have a strategy to become MNCs with similarly high value strategic deals to take India to $5 trillion economy.
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