Why Hindalco’s Novelis may have a thing for Aleris
If China’s Zhongwang is unable to acquire Aleris Corp., a US-based producer of rolled aluminium products, then India’s Hindalco Industries Ltd may bid for it. Hindalco’s subsidiary Novelis Inc., in a similar business as Aleris, may find value in acquiring it. The asking price is not trifling, and estimated at about $2.5 billion (around Rs16,325 crore today), according to this report in Mint. It could go higher if others join the fray.
Why would Novelis be interested in Aleris? It has some spare cash, for starters. In May, it had announced the sale of a 50% stake in a South Korean unit for $315 million. Post-tax, it would get $260 million and that cash can be used for an acquisition, said its management in a conference call held in May. Its balance-sheet capability is also much improved, with free cash flow of $361 million in fiscal year 2017 (FY17), up 2.3 times over the previous year, and its net debt to adjusted Ebitda has fallen below four times. Ebitda is short for earnings before interest, tax, depreciation and amortization.
One main reason for this improved situation is better profitability, which has improved due to a better mix (higher share from the automotive segment) and operational efficiencies. Novelis’s shipments to the auto industry have increased, to 18% in FY17 from 15% a year ago, and are expected to reach 25% by end-FY19. This is a conscious shift, as this contributes to better margins. But FY19 will also see its capacity to service the industry peak and the firm will need to invest to raise capacity. That’s where Aleris comes in.
In one shot, Novelis can add to its own capacity, keep the market balanced (which would have seen more supply if Novelis had expanded on its own) and also prevent a rival from gaining access to this plant. Why it did not do so a year earlier, when Zhongwang had made a successful bid, one might ask. Perhaps it is more confident now of being able to digest the acquisition, financially speaking.
As of FY17, while the auto segment contributed 18% to Novelis’s sales by volume, aluminium cans contributed 60% while specialities contributed the rest. It would like the share from automotive to go higher. Aleris has invested $350 million in expanding its automotive sheet body capacity, which is due to be commissioned in 2017. That gives an acquirer the edge, with sales getting a boost once shipments get going.
Aleris does not break up its segments by sales but building and construction, distribution, automotive and aerospace are some of its key segments. By region, North America contributed to 52% of revenue, 45% came from Europe and 3% from Asia-Pacific. Both the regional break-up and end-use industries suit Novelis.
On the financial front, Aleris is relatively small on the revenue front, generating $776 million in sales in the June 2017 quarter compared to Novelis’s $2.7 billion, but is profitable and the gap in their Ebitda/tonne is not insurmountable. An acquisition, in any case, would be one that explores ways of lowering costs and improving efficiencies.
Novelis’s parent Hindalco too has a stronger balance sheet and cash flows, now that its expanded capacity has ramped up. That should give it additional comfort in supporting its subsidiary in this acquisition, if required.