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H indalco novelis


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H indalco novelis

  1. 1. Merger & Acquisition (Hindalco & Novelis)<br />Presented by:<br />Anand Mishra<br />Jeewan Das Mohta<br />Sansad Panigrahi<br />Siddhartha Anand<br />Sumit Kamra<br />
  2. 2. 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 /><br />
  3. 3. Introduction<br />
  4. 4. <ul><li>Highly concentrated industry with only five primary plants in the country.
  5. 5. Electricity, coal and furnace-oil are primary energy inputs.
  6. 6. Energy cost is 40% of manufacturing cost for metal and 30% for rolled products.
  7. 7. High cost of technology is the main barrier in achieving high energy efficiency.
  8. 8. Energy conservation and reduced consumption is main motive.
  9. 9. Increased competition from imports of aluminum.</li></ul>Indian Aluminum Industry<br />
  10. 10. <ul><li>A flagship company of Aditya Birla Group - structured into two strategic businesses Aluminum and Copper.
  11. 11. Commenced its operations in 1962 and today it has grown to become the country’s largest integrated aluminum producer.
  12. 12. Annual revenue of US $14 billion. market capitalization in excess of US $ 23 billion.
  13. 13. The aluminum division's product range includes alumina chemicals, primary aluminum ingots, and billets, wire rods, rolled products, extrusions, foils and alloy.
  14. 14. The company reduced has SG&A costs from 4.15% to 2.96% and led to a bottom line growth from 15.8B to 26.9B</li></ul>Hindalco<br />
  15. 15. Novelis <br /><ul><li>A spin-off from Alcan - rich 90-year history in the aluminium rolled product marketplace.
  16. 16. The US and European anti-trust proceedings ruled that the rolled products business of either Alcan or Pechiney had to be divested from the merged entity.
  17. 17. World leader in aluminium rolling - producing an estimated 19 percent of the world's flat-rolled aluminium products.
  18. 18. World leader in the recycling of used aluminium beverage cans.</li></li></ul><li>Novelis <br />46 Operations in 13 countries<br />
  19. 19. STRATEGIC FIT<br />
  20. 20. <ul><li>Presence in two fastest growing non ferrous metal Segment – Al and Cu
  21. 21. Aluminium : Integrated Operations
  22. 22. Copper : Partial Integration
  23. 23. Aluminium
  24. 24. Build low cost upstream
  25. 25. Buy High end downstream
  26. 26. Global presence
  27. 27. Copper
  28. 28. World class operations
  29. 29. Reduced volatility</li></ul>Hindalco Strategy<br />
  30. 30. <ul><li>Simple business model buying primary aluminium, process and selling to customers such as Coke and Ford.
  31. 31. Wrong management decision led to losses of $350 million (in 2006).
  32. 32. Inefficiency of the management and finance team.
  33. 33. Novelis ended up inheriting a debt mountain of almost $2.9 billion on a capital base of less than $500 million</li></ul>Strategic Perspective : Novelis<br />
  34. 34. <ul><li>Novelis processes primary aluminum to sell downstream high value added products, this is what Hindalco manufactures, So perfect Marriage.
  35. 35. Novelis had a capacity to produce 3 million tonne while Hindalco has a capacity of 2,20,000 tonne.
  36. 36. It would have taken a minimum of 8-10 years for Hindalco for building these facilities.
  37. 37. Hindalco got the fusion technology of Novelis which increased the formability of aluminium.
  38. 38. As per company details, the replacement value of the Novelis was $12 billion, so considering the time required and replacement value; the deal was worth for Hindalco.
  39. 39. The immediate effect of the merger is that Hindalco would achieve its target of doubling its turnover to $ 20 billion three years in advance</li></ul> Rationale for Acquisition<br />
  40. 40. Future Outlook<br />,Rakesh%20Gupta%20final.pdf<br />
  41. 41. Post deal analysis<br />
  42. 42. <ul><li>The markets questioned Hindalco’s assumption that more aluminium would be consumed by automobile, transport, electronics and cola companies.
  43. 43. He has been proved right three years hence.
  44. 44. Novelis expects transport and electronics sectors to be global demand drivers and clock 20-25 per cent growth in 2011, as developed markets revive.
  45. 45. 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.
  46. 46. Europe has seen y-o-y volume growth of 10 per cent. </li></ul>Post Deal analysis<br /><br />
  47. 47. 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.
  48. 48. 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.
  49. 49. Disruption in production due to external factors.</li></ul>T<br />O<br /><br />
  50. 50. Post Deal analysis<br /><br />
  51. 51. FINACIAL FIT<br />,Rakesh%20Gupta%20final.pdf<br />
  52. 52. <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.
  53. 53. 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 />
  54. 54. <ul><li>Hindalco had over $800 million (Rs 3,520 crore) in cash and equivalents
  55. 55. Debt to Equity Ratio almost Zero
  56. 56. 55% increase in net profit from 2006 to 2007
  57. 57. Net profit of 25,643 crore as per 2007 balance sheet.</li></ul>Hindalco Financial – pre acquisition<br />
  58. 58. <ul><li>If 66.66% of the shareholders okay the deal, remaining shareholders would be compelled to sell their share to Hindalco under the Canadian law.
  59. 59. If the 66.66% approval was not obtained, Birla had the right to walk away from the deal
  60. 60. Hindalco made the Novelis board sign a $100- million break fee, the price Novelis had to pay if it finds another buyer.
  61. 61. There was also a clause of ‘new buyer premium ’of a $5dollars a share’ over the 44.93$ per price- only at that price could Novelis entertain a fresh rival bid..</li></ul>Rules of the deal<br />
  62. 62. Deal structure<br /><ul><li>The deal was an all cash transaction of US $6 billion, which included debt of US $ 2.4bn.
  63. 63. Hindalco personally contributed US $450 million
  64. 64. Aditya Birla group company Essel Mining contributed US $300 million
  65. 65. US $455mn through liquidation of investments
  66. 66. Hindalco paid $44.93 in cash for each outstanding common share of Novelis, around 15% premium to the market price
  67. 67. Hindalco planned to replace existing $2.4bn loan by term loan of US $1bn and high yield bonds of US $1.4bn
  68. 68. 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.
  69. 69. 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.
  70. 70. 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 />
  71. 71. <ul><li>As per analysts Birla were paying too high since Novelis indicated loss of $240-285 million in 2006.
  72. 72. Novelis indicated pretax profit of $30-100 million in 2007.
  73. 73. Price paid translates to market capitalization /PBT multiple of 36 on Novelis’s 2007 forecast
  74. 74. Hindalco paid 11.4x EBITDA, 20.7x EBIT or 53.4x PE.
  75. 75. At a total enterprise value of US $ 6 billion. Novelis was nearly 50% larger than Hindalco’s current market capitalization.
  76. 76. 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.
  77. 77. 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 />
  78. 78. <ul><li>Acquisition was going to expose Hindalco to a weaker balance sheet
  79. 79. Company was moving from high margin metal business to low margin.
  80. 80. Acquisition was going to increase revenue but was going to increase debt burden and erode profitability</li></ul>Financial Challenges<br />
  81. 81. <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
  82. 82. 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
  83. 83. 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 />
  84. 84. CULTURAL FIT<br />
  85. 85. <ul><li>Standardization : Prior to June 2007 , Hindalco’s financial year ended on March, 31st, whereas Novelis’ period ended on December, 31st
  86. 86. Guidelines of SEBI & SEC were met.
  87. 87. Plan to optimize tax bills of both countries.
  88. 88. Sharing best practices.</li></ul>Financial Integration<br />
  89. 89. <ul><li>Existing management structure ,system ,people (Job Roles ) left undisturbed.
  90. 90. 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
  91. 91. No Layoffs ,however hiring activities were kept on hold for sometime.</li></ul>Organisational Integration<br />
  92. 92. <ul><li>Plain and simple techniques to manage business.
  93. 93. It set up a company to manage IT functions of Novelis due to availability of inexpensive engineers.
  94. 94. 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 />
  95. 95. <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.
  96. 96. 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 />
  97. 97. Similar deals<br />
  98. 98. <ul><li>Tata-Corus
  99. 99. On 20 October 2006 the board of directors of Anglo-Dutch steelmaker Corus accepted a $7.6 billion takeover bid from Tata Steel, the Indian steel company.
  100. 100. Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at USD 12.04 Billion.
  101. 101. The deal is the largest Indian takeover of a foreign company and made Tata Steel the world's fifth-largest steel group.
  102. 102. The United Company
  103. 103. Formed by the merger of RUSAL, SUAL, and the alumina assets of Glencore, completed in March 2007.
  104. 104. The combined company became the world’s biggest aluminum maker, worth $25-30 billon</li></ul>Similar deals in industry<br />
  105. 105. SEBI Norms<br />
  106. 106. <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
  107. 107. The minimum number of shares for which the offer is to be made
  108. 108. The minimum price at which the shares must be Acquired
  109. 109. In the event the public shareholding in the Indian Company falls below the specified 10%, then
  110. 110. 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 .
  111. 111. 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 />
  112. 112. THANK YOU<br />