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Hindalco to acquire US-firm Aleris through subsidiary Novelis in $2.58 billion deal

Margins, product mix for Novelis will improve, say analysts

Salil Panchal
Published: Jul 26, 2018 10:26:13 PM IST

Hindalco to acquire US-firm Aleris through subsidiary Novelis in .58 billion dealHindalco chairman Kumar Mangalam Birla
Image: Aditi Tailang

Hindalco’s wholly owned Georgia-based Novelis on Thursday announced a move to acquire Aleris Corporation, a global privately-held aluminium rolled products company, for $2.58 billion in a debt finance deal. The move, analysts said, will not just help Novelis solidify its position globally and also improve their margins.

The deal, which would be completed over the next 9 to 15 months, will be fully financed in the books of Novelis, Hindalco chairman Kumar Mangalam Birla told media.  Around $775 million will be in the form of cash payment for the equity component, while the balance will be $1.8 billion in debt, in the books of Aleris, which will be absorbed by Novelis.

“The acquisition of Aleris is the next phase of our aluminium value added products growth strategy,” Birla said. Post the acquisition, the Novelis–Aleris combine will have a capacity of 4.7 million tonnes per annum (including that of Hindalco).

Cleveland-headquartered Aleris is a global supplier of aluminium rolled products which are used towards high-end aerospace and automobile sector, building and construction and truck trailer segment in North America. Aleris witnessed 800,000 tonnes of shipment in 2017 on revenues of $3 billion.

Post-acquisition, the capacity of the N&A combine will be 4.7 million tonnes per annum, including Hindalco.

Shares of Hindalco fell 4.7 percent over the past two trading days at the BSE to a low of Rs 202 apiece on Thursday, prior to the announcement of the deal, on concerns of the high debt in Novelis’s books.

But Birla allayed the concerns saying: “In a situation like this when the news comes out partly, the stock does react. Once investors understand that (acquisition) multiple is about only 7.2 -- given that the Ebitda will be $360 million the year which we take over the company -- I believe the investors will view this as a very positive development,” he said at the press conference.

Sanjay Jain, a metal and power sector analyst at Motilal Oswal Securities said that despite the increasing debt for Novelis, there are strong synergies for the two companies. “They operate in the same line of businesses. This acquisition will help Novelis improve their margins too,” Jain told Forbes India. Commenting on the fears investors might have had regarding the Aleris acquisition, Jain said, “The devil is out, they will understand the deal better.”

Birla believes that Aleris – which has invested $900 million in new assets in the automotive and aerospace segments, is on the cusp of transformational growth. “Aleris’s investments will start to drive earnings and cash flow momentum. There is also a strategic rationale for the deal, it will improve Novelis’s product mix to include segments such as aerospace,” he added.

A media presentation from Novelis shows that post the Aleris deal Novelis’s product mix would include beverage can sheets at 47 percent (from the current 61 percent), automobile would rise to 22 percent (from 20 percent), building and construction and truck trailer at 8 percent and aerospace another 8 percent, while specialities will be steady at 19 percent.

Novelis, which was acquired by Hindalco in 2007 for $6 billion, has since invested $2 billion in the business over the past decade. It is now a leader in the aluminium value added products segment in terms of size.

Hindalco reported a consolidated profit of ₹6,082.87 crore during FY18. Novelis reported a net income attributable to common shareholders of $635 million and adjusted EBITDA to $ 1,215 million in FY2018 from $1,085 in FY17, according to an investor presentation in May this year.

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