Hindalco shares did not fall even as its US-arm Novelis’s proposed purchase of Aleris hit a hurdle
Firm’s assurance that it is committed to closing the deal may have brought some comfort
Hindalco Industries Ltd’s shares did not react negatively on Thursday even as its US-based wholly-owned subsidiary, Novelis Inc.’s proposed acquisition of Aleris Corp. hit a hurdle. The US department of justice (DoJ) has filed a civil antitrust lawsuit seeking to block the acquisition of Aleris. This has been done to preserve competition in the North American market for rolled aluminium sheet for automotive applications. DoJ’s chief concern is that the deal would reduce competition in the US auto sheet market, considering that Novelis and Aleris are two out of the four producers of aluminium auto body sheet.
Hindalco’s investors appear to have taken this in their stride. The stock closed 1.6% higher on the National Stock Exchange on Thursday; but note that the risk of running into antitrust problems has been known for a while now.
Novelis’s assurance that it is committed to closing the Aleris acquisition also soothed some investor anxieties. The company contends that the market definition adopted by DoJ is narrow and does not take into account steel body sheets, which is currently used by almost 90% of the market.
According to Amit Dixit, analyst at Edelweiss Securities Ltd, Novelis has a good case as it is upon DoJ to prove that there is a distinct auto body market for aluminium sheets in the US, where customers will face reduced competition. “Given the current market size, it does not seem to be the fact. However, we will wait to see if any remedies are given," he added.
There will be trouble if the company goes ahead with the deal after excluding some divisions to appease authorities such as DoJ. “The acquisition is undoubtedly a strong strategic fit to Novelis as it increases its dominance in auto sheet, gets entry in aerospace and becomes backward integrated in China," analysts from Kotak Institutional Equities said in a note last month. Leaving out some parts of the Aleris business will make the acquisition far less valuable.
As it is, the increase in leverage due to the acquisition is a bit of a worry. As analysts from Kotak said: “Despite the strategic fit, cancellation of the Aleris deal would imply lower leverage and would be value-accretive in the current environment."
Meanwhile, Hindalco’s shares have declined by 10% so far in FY20. In general, analysts remained positive on the stock and the recent fall does make valuations relatively cheaper to that extent.
“Cost competitiveness in Hindalco’s India operations driven by increased coal security, quick ramp-up of new capacities and high margins at Novelis/Aleris with higher proportion of automotive products in the mix continues to drive an upward earnings trajectory for the consolidated entity," analysts from JM Financial Institutional Securities Ltd said in a report on 9 August.