How Kumar Mangalam Birla salvaged the Hindalco-Aleris deal
The Aleris acquisition by Hindalco’s Novelis was sealed only after Aditya Birla Group chairman Kumar Mangalam Birla stepped in to address contentious issues
Mumbai: Till March this year, there was no way that Aditya Birla Group was getting to acquire Aleris Corp.—an ambition it first harboured in August 2017 when symptoms of a potential failure started to crop up between an earlier agreed upon merger between China’s Zhongwang USA LLC and the Cleveland-based American company.
Zhongwang was to buy Aleris for $2.33 billion.
The US Department of Justice was closing in on Liu Zhongtian, majority owner of Zhongwang USA, whose affiliate Perfectus Aluminium Inc. was accused of evading $1.5 billion in tariffs by illegally importing aluminium into the US. This development happened even as president Donald Trump was readying ground for a trade war with China and sought ways to turn its economy inwards. Several Chinese takeovers of US companies faced heightened scrutiny by the Trump administration.
In September, the administration blocked a Beijing-backed fund’s attempt to buy an American chip maker, Lattice Semiconductor Corp. In July, Chinese conglomerate HNA Group Co.’s planned $416-million purchase of a Los Angeles in-flight entertainment company, Global Eagle Entertainment Inc., collapsed because the companies didn’t get approval from the country’s Committee on Foreign Investment in the US (CFIUS). The same CFIUS refused approval to Zhongwang USA after 27 US senators urged the Treasury to reject the sale, calling it a “strategic misstep”.
In November, Aleris and Zhongwang called off the deal, paving the way for the 51-year-old Kumar Mangalam Birla to acquire the company for $2.58 billion, making Hindalco the world’s second-largest aluminium company and the world’s largest aluminium company outside of China.
“There was a period when talks had almost come to a standstill in Aleris and bankers were told that the acquisition in all likelihood may not happen,” a person aware of the matter said on condition of anonymity.
Reason: A hike in valuation being sought by Aleris, apart from clarity on regulatory and people-related issues.
In fact, this was the second time the Group was pulling out from the race. Aditya Birla Group had first evaluated the transaction in 2008 when it was deciding to bid for Novelis for $6 billion 10 years ago. In 2009, Aleris filed for Chapter 11 bankruptcy and was acquired by private equity funds Apollo Management, Oaktree Capital Management, and Sankaty Advisors in the following year.
“K.M. Birla himself stepped in to address some contentious issues...,” the person cited above added. In an interview on Thursday, Birla confirmed that he had to intervene at some point. “I think it was required and expected. Our acquisitions are about value-creation,” Birla said.
Zhongwang was to buy Aleris for $2.33 billion. So, why did Birla pay a premium—as many believe? Because, Aleris has made investments of $900 million, which are yet to reflect in its earnings. In two years, once these investments start to yield returns, the total debt of Hindalco, which will almost double to $6 billion after this acquisitions will come down to $3 billion—significantly lower than its current debt of $3.5 billion.
That aside, “Most others were only interested in the US’s Lewisport asset while we were also interested in getting into aerospace and China, which is going to be our biggest synergy,” said Steve Fisher, chief executive of Novelis Inc.
Nevertheless, the deal bore the hallmark of a long tradition of group founders stepping in to steer negotiations whenever potential acquisitions appeared to collapse, whether due to differences on valuation or other issues. Another example of Birla stamping his authority on such crucial issues is one of the most complex mergers between Idea Cellular Ltd and Vodafone India Ltd, where he proposed to Vodafone India to merge with Idea Cellular—a deal for which Vodafone Group Plc readily agreed even as it virtually meant that Vodafone will exit the telecom company business and reap dividend as a shareholder while Birla will continue to run the show in a battle for supremacy against Sunil Mittal-controlled Bharti Airtel Ltd and Mukesh Ambani’s Reliance Jio Infocomm Ltd.
“Mr. Birla understands the sensitivities involved at late-stage negotiation of such cross-cultural transactions and the significant difference it makes when promoters are involved themselves at such stage,” said Bharat Banka, a former head of Group Finance at Aditya Birla Group, who now runs a niche business and management consulting practice. “It cuts down negotiation time significantly and it gives a different level of comfort to the seller(s) reassuring them of the seriousness and intent commitment of the buyer,” he added.
Birla is playing a similar role with the acquisition of Dalmia Cement now. About Aleris, Aditya Birla Group had sounded off bankers as early as August last year about the potential deal.
“What worked to the advantage of Aditya Birla Group is that apart from China’s Zhongwang, there were no bidders for the whole company,” said the person cited above. “Aleris operates close to 40 small and large plants spread across North America, Europe and Asia. Potential bidders included Japan’s Kobe Steel and India’s Vedanta group, but none of them it seems wanted all the facilities”, said the first person cited in the story.
“I am not aware of who the other bidders were but we were given to understand that much of the interest was centred around the Lewisport plant only, which is the company’s largest facility in North America,” said Satish Pai, managing director of Hindalco.
Pai in a January interview said that Novelis will now focus on organic growth by investing $300 million to build an automotive aluminium sheet manufacturing facility in Guthrie, Kentucky.
The timing of the Hindalco-Aleris deal too was crucial for Aditya Birla Group. After almost a decade-long lull commodity prices had begun recovering, thereby freeing up cash flows of both Novelis and Hindalco. “For the private equity owners of Aleris, this coincided with the timing of their exit from the asset,” said another person aware of the matter.
Birla understood this and pushed for the Hindalco-Aleris deal aggressively.
At the promoter level too, the timing seems to have worked well. Unlike the Novelis acquisition where promoters had to infuse close to $350 million in equity, Aleris will be 100% debt funded with most of Aleris existing debt to be refinanced.
“The entire debt should take care take of itself from the cumulative cash flows of Aleris and Novelis and I am of the view that some potential some downward corrections in the commodity prices owing to collateral damage from global trade war will not impact the margins in a major way, especially in the context of much larger size of cash-flows and balance sheet” said Banka.
“Almost all of the large entire capex cycle for of Hindalco and Aleris seems to be completed and overall EBITDA will only improve from here on, which should give the Birla Group all the firepower he may need to fund future expansion without equity dilution,” he added.