In a bid to win more business from soft drink manufacturers, it promised four customers not to increase product prices even if raw material aluminium prices went up beyond a point. A few months after Novelis signed those contracts, aluminium prices shot up 39 per cent (between 30 September 2005 and 2006). To these four customers, Novelis was forced to sell its products at prices that were lower than raw material costs. These four account for 20 per cent of Novelis’s $9-billion revenues. But the management’s wrong judgement led to losses of $350 million (in 2006)
We look upon the aluminum business as a core business that has enormous growth potential in revenues and earnings,' 'Our vision is to be a premium metals major, global in size and reach .... The acquisition of Novelis is a step in this direction<br />-Kumar Mangalam Birla, Chairman, Hindalco Industries<br />Hindalco Novelis <br />http://www.slideshare.net/gagan3211/merger-acquisition-hindalco-novelis<br />
Novelis expects transport and electronics sectors to be global demand drivers and clock 20-25 per cent growth in 2011, as developed markets revive.
Rolled product shipments are up eight per cent year-on-year (y-o-y) in North America due to growth in can, automotive and industrial products.
Europe has seen y-o-y volume growth of 10 per cent. </li></ul>Post Deal analysis<br />http://www.hindalco.com/investors/downloads/Hindalco_Annual_Report_Notice2011%20.pdf<br />
Weaknesses<br /><ul><li>The R&D expenditure is very low compared to industry standards</li></ul> S<br />Strengths<br /><ul><li>Hindalco became the world leader in flat-rolled aluminium products and recycling of aluminium cans.
leading producer in primary aluminium and alumina in Asia.</li></ul>SWOT Analysis<br />W<br />Opportunities<br /><ul><li>Strong growth in demand for aluminium</li></ul>Threats<br /><ul><li>Prices of primary metals are highly volatile.
Disruption in production due to external factors.</li></ul>T<br />O<br />http://hindalcoindustrieslimited.blogspot.com/2010/12/swot-analysis-of-hindalco.html<br />
Post Deal analysis<br />http://www.moneycontrol.com/india/stockpricequote/aluminium/hindalcoindustries/HI<br />
<ul><li>After spinoff (Alcan and Pechiney) Novelis inherited a debt mountain of almost $2.9 billion on a capital base of less than $500 million.
Acquisition time on a net worth of $322 million, Novelis had a debt of $2.33 billion (most of it high cost).</li></ul>Debt/Equity =7.23:1<br /><ul><li>Novelisfor the first nine months of 2006, had a loss of $170 million (Rs 765 crore) on revenues of $7.4 billion (Rs 33,300 crore).</li></ul>Novelis Financials: Pre acquisition<br />
<ul><li>Hindalco had over $800 million (Rs 3,520 crore) in cash and equivalents
Hindalco paid $44.93 in cash for each outstanding common share of Novelis, around 15% premium to the market price
Hindalco planned to replace existing $2.4bn loan by term loan of US $1bn and high yield bonds of US $1.4bn
Hindalco raised US $ 2.8 billion of debt through 2 special purpose vehicles</li></li></ul><li><ul><li>2007 :Hindalco-Novelis deal, UBS (along with ABN AMRO & Bank of America) threw the Birla company a $2.8 billion debt lifeline.
2008: $1-billion loan was taken on Hindalco’s books, and the banks that participated in the exercise included ABN Amro, Barclays Capital, Bank of Tokyo-Mitsubishi UFJ, Calyon, Citigroup, Deutsche Bank, HSBC, Mizuho Financial and Sumitomo Mitsui Financial.
2009:Hindalco took a syndicated loan of $982 million (Rs 4,910 crore at current rate) from 11 foreign banks to repay the bridge loan taken two years ago for the Novelis acquisition. </li></ul>Banks involved<br />
<ul><li>As per analysts Birla were paying too high since Novelis indicated loss of $240-285 million in 2006.
Novelis indicated pretax profit of $30-100 million in 2007.
Price paid translates to market capitalization /PBT multiple of 36 on Novelis’s 2007 forecast
Hindalco paid 11.4x EBITDA, 20.7x EBIT or 53.4x PE.
At a total enterprise value of US $ 6 billion. Novelis was nearly 50% larger than Hindalco’s current market capitalization.
At Novelis long term annual free cash flow target of US $400m (using a real WACC of 9%), it was estimated that acquisition would destroy value by INR60/share.
Hindalco would need to improve annual free cash flow by 35% to US $540m for the acquisition to be value (NPV) neutral.</li></ul>Valuation for acquisition<br />
<ul><li>Acquisition was going to expose Hindalco to a weaker balance sheet
Company was moving from high margin metal business to low margin.
Acquisition was going to increase revenue but was going to increase debt burden and erode profitability</li></ul>Financial Challenges<br />
<ul><li>The deal would create value only after completion of Hindalco’s expansion plans, and due to its highly leveraged position, its plans may get affected
Adverse changes in currency exchange rates or aluminium prices could negatively affect the financial results and competitiveness of company’s aluminium rolled products relative to other materials
The end-use markets for certain products of Novelis products were highly competitive and customers are willing to accept substitutes for the company products</li></ul>Risk Factors<br />
In the first six months after the take over Hindalco deputed just two of its own executives to Novelis: it sent an expert from its copper division to institutionalize a risk-management process and installed a senior executive in Novelis ’logistics department to help improve its global supply chain
No Layoffs ,however hiring activities were kept on hold for sometime.</li></ul>Organisational Integration<br />
<ul><li>Plain and simple techniques to manage business.
It set up a company to manage IT functions of Novelis due to availability of inexpensive engineers.
Hindalco had set Novelis a target of seven to 12 stock turns per year by 2010,which could free around $300 million in working capital</li></ul>Business Process Integration<br />
<ul><li>India’s demand for aluminium products was projected to double from 1 million tones in 2007 to almost 1.9 million tones in 2012.
Half of the increase would be for the kind of flat-rolled products Novelis produces. Thus, India could absorb a third of the North American company’s output in three years’ time</li></ul>Market Integration<br />
<ul><li>The Takeover Code stipulates requirement, depending upon the nature and quantum of the acquisition, making an offer to purchase shares from the public shareholders, including
The minimum number of shares for which the offer is to be made
The minimum price at which the shares must be Acquired
In the event the public shareholding in the Indian Company falls below the specified 10%, then
The acquirer has to make an offer to buy out the outstanding shares remaining with the shareholders, resulting in de-listing of the Company, or for delisting the company process prescribed under delisting guidelines needs to be followed .
The acquirer has to divest, through an offer for sale or by a fresh issue of capital to the public, to keep the public holding at the prescribed levels and prevent a delisting</li></ul>SEBI Guidelines (Takeover code)<br />