Mumbai: Hindalco Industries Ltd has offered to buy Novelis Inc. in a $6 billion all-cash deal that will marry the world’s 13th largest maker of aluminium with a major maker of car parts, cans and other packaging, creating a potent global force in the metals business.
The deal, which has been approved by both boards, reinforces the emergence of Indian companies as a force to reckon with in global dealmaking, coming just days after Tata group won the bidding for Anglo-Dutch steelmaker Corus Plc in what was the largest foreign transaction in India’s corporate history. The Novelis deal is the second-largest.
“The trend for Indian companies now is to look westwards, acquire companies and establish themselves as multinational companies,” says J. Venkatesan, who oversees $1.5 billion of assets at Sundaram BNP Paribas in Chennai. “Investors will want to know what kind of benefits will accrue to Hindalco in the long run.”
Hindalco is offering $44.93 a share, amounting to Rs26,400 crore once Novelis’ debt of $2.4 billion is included in the transaction value. The per-share price is nearly a 17% premium to where Novelis’ shares were trading on Friday.
Novelis shares have more than doubled in the past year after touching a 12-month low of $17.89 a share last February.
“When you are acquiring a world leader, you will have to pay a premium,” said Kumar Mangalam Birla, chairman of the Aditya Birla Group, whose flagship company is Hindalco. “This is something reasonable.”
Hindalco managing director Debu Bhattacharya said his company would have taken a decade if it were to build the kind of manufacturing assets that Novelis owned.
Analysts were quick to note that Hindalco, which already exports 16% of its total sales volume, is one of the lowest-cost makers of aluminum. In buying Novelis, the combined company would gain significant synergies in supplying Novelis’ customers, ranging from Ford Motor Co. to Eastman Kodak and Coca-Cola Co., and spread across 11 countries. “This is a very good move from Hindalco,” said Arvind Desai, head of research at Niche Brokerage. “Hindalco will be able to ship primary aluminium from India and make value-added products.”
Novelis, which has 12,500 employees and reported $8.4 billion in 2005 revenue, is headquartered in Atlanta and is listed on both the New York and Toronto stock exchanges. It will remain a wholly owned subsidiary once the deal is closed, Hindalco said.
Hindalco said it doesn’t plan to sell shares to fund the purchase and that the deal is not conditional to obtaining financing. Birla said about $450 million of the purchase will come from Hindalco while the rest would debt. An unlisted iron ore mining company, Essel, which is part of the Aditya Birla group, will provide $350 million.
The transaction, subject to just over 66% of Novelis shareholders approving it, is expected to close in the second quarter, following Canadian regulatory clearances. Hindalco said that while it doesn’t expect a rival bidder to emerge, it had signed a $100 million break-up fee agreement with Novelis.
Because aluminium products are a lot less cyclical in terms of pricing than the metal itself, the acquisition will also offer Hindalco a much more stable earnings flow.
If the deal is completed, it will put Hindalco among the top five aluminium producers in the world and also propel Hindalco’s parent —the Aditya Birla group—to the elite Fortune 500 list of global companies, which is based on revenues. Following the acquisition, half of the Aditya Birla group’s revenues will come from its overseas operations, up from the current 30%.
Novelis was spun off by Alcan, the world’s largest producer of aluminium after Alcoa Inc., in order to satisfy antitrust concerns after acquiring France’s Pechiney SA for about $4 billion in February 2004.
Novelis reported a loss of $170 million for the first nine months of 2006, primarily because it had entered some three-year contracts to sell aluminium sheets at a fixed price even as prices rose by as much as 28%. The last of these four contracts will end by 2010, according to S. Talukdar, Hindalco’s chief financial officer.
Hindalco, with annual sales of $2.6 billion, had previously announced capital expenditure plans of Rs 25,000 crore, slightly less than what they intend to pay for Novelis. Those plans will remain unchanged, Bhattacharya said.
Debarati Roy of Bloomberg contributed to this story