Hindalco novelis acquisition

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Hindalco novelis acquisition

  1. 1. Made by- BFIA 3B- Priyank Misra 75140 Puneet Arora 75141 Shantanu Vashishth 75150 Ujval Chopra 75162 Submitted to- Dr. Manoj Sharma When asked whether Hindalco is paying a higher price, K.M. Birla said, “When you are acquiring a world leader you will have to pay a premium”.
  2. 2. Pre-Acquisition Acquisition Process Post-Acquisition THE 3 STAGES
  3. 3. PRE-ACQUISITION Introduction to Hindalco & Novelis Financial Health of Hindalco & Novelis Is It a Merger or an Acquisition?
  4. 4. Hindalco Industries Ltd.  Hindustan Aluminium Company is one of the world's largest aluminum manufacturing companies and is a subsidiary of the Aditya Birla Group. It employs 13,675 people and is listed on Forbes 2000. A metals powerhouse with a turnover of US$14 billion, Hindalco is one of the world's largest aluminium rolling companies and one of the biggest producers of primary aluminium in Asia.  The Hindustan Aluminum Corporation Limited was established in 1958 by the Aditya Birla Group. In 1962 the company began production in Renukoot in Uttar Pradesh. In 1989 the company was restructured and renamed Hindalco.  It was the first company to surpass 0.5 mT of production in a fiscal year. Its major products include rolled aluminium sheets, aluminium foil and refined aluminium.  On February 11, 2007, the company entered into an agreement to acquire the Canadian company Novelis for US$6 billion, making the combined entity the world's largest rolled-aluminium producer.
  5. 5. Novelis Inc.  Novelis Inc. is a global aluminum company headquartered in Atlanta, Georgia, started incorporated in 2005 as a spin-off from Canadian mining and aluminum manufacturer, Alcan Inc.  Novelis is the world’s largest producer of rolled aluminum sheet, with operations spanning 11 countries and nearly 11,000 employees.  The company serves customers in sectors including beverage cans, automotive, consumer electronics, construction, foil and packaging.  Demand for aluminum is increasing with the continued development of emerging nations, urbanization, and the increasing substitution of aluminum for other materials, making expansion a key consideration. The company is investing $100 million in its first manufacturing facility in China set to open in 2014. In response to global demand for aluminum sheet for automotive, electronics and beverage cans, the company has announced capital investments including a $400 million expansion in Asia, a $300 million expansion in Brazil and $200 million expansion in North America.
  6. 6. Production of Aluminum in India Production Capacity of Hindalco vis-à-vis Novelis2005 (in tonnes) 2006 (in tonnes) Hindalco 190,581 211,088 Novelis 2,873,000 2,960,000 Figures pertain to financial year end Company Product/Raw Material Units March 2005 March 2006 Bharat Aluminium Co. Ltd. Aluminium Ingot, Billet, Alloys, Slab, Bus-Bar „000 tonnes 8.61 46.46 Hindalco Industries Ltd. Aluminium Metal/Ingots „000 tonnes 409.07 429.14 Hiren Aluminium Ltd. Aluminium Rods „000 tonnes 23.30 35.4 Madras Aluminium Co. Ltd. Primary Metal (Ingots, Billets & Alloys) „000 tonnes 2.97 2.54 National Aluminium Co. Ltd. Aluminium Ingots „000 tonnes 146.32 163.65
  7. 7. SALES AND MARKET SHARE OF DIFFERENT ALUMINIUM COMPANIES IN INDIA Sales figures are in Rs. crore & pertain to financial year end Company March 2005 March 2006 Sales Market Share (%) Sales Market Share (%) Bharat Aluminium Co. Ltd. 1244.89 7 2161.07 10 Hindalco Industries Ltd. 10815.59 62 12772.55 59 Hiren Aluminium Ltd. 256.27 1 446.68 2 Madras Aluminium Co. Ltd. 358.24 2 433.62 2 National Aluminium Co. Ltd. 4696.20 27 5545.53 26 Century Aluminium Co. Ltd 245.01 1 297.31 1
  8. 8. Financial Health of Hindalco 0.00 5.00 10.00 15.00 20.00 25.00 30.00 2004-05 2005-06 2006-07 D/E ROE Current Ratio EPS 2004-05 2005-06 2006-07 D/E 0.64 0.67 0.66 ROE 16.79 16.85 20.96 Current Ratio 1.77 2.01 1.93 EPS 13.03 16.02 26.73
  9. 9. Financial Health of Novelis 2004 2005 2006 D/E 4.41 6.00 11.08 ROE 0.09 0.19 -1.41 Current Ratio 1.44 1.67 1.38 EPS 0.10 0.21 -1.41 -4.00 -2.00 0.00 2.00 4.00 6.00 8.00 10.00 12.00 2004 2005 2006 D/E Current Ratio ROE EPS
  10. 10. Is It a Merger or an Acquisition?  A merger is a combination of two or more corporations in which only one corporation survives and the merged corporations go out of business.  Under AS-14, if all of the following conditions are satisfied, then this would be a considered a merger- • Equity shareholders holding at least 90% of equity share capital should agree to become shareholder of the company. • Such shareholders should be paid equity shares only and cash to settle fractions. • All assets and liabilities should be taken over by new company • Such assets and liabilities should be taken at book value • New business should carry on some old business of old company  However, since this deal did not involve any payment in equity shares to the shareholders of Novelis, to be swapped for shares for Hindalco, and instead it was an all-cash deal structure, this exercise cannot be said to be a merger.  This exercise was an acquisition of Novelis by Hindalco, where a company(Hindalco) buys most, if not all, of the target company's (Novelis) ownership stakes in order to assume control of the target firm. Like in most acquisition deals, it was paid for in cash.
  11. 11. ACQUISITION Deal Structure Funding the Deal
  12. 12. DEAL STRUCTURE  It was an all-cash deal(hence, no Exchange Ratio).  Hindlaco’s AV Metals had acquired all of the Novelis’ outstanding 75,415,536 common shares at a price of US $44.93 per share  Thus, Novelis equity was acquired for a sum of $3.6 billion against a book value of $195 million(= $0.195 billion).
  13. 13.  Out of $3.6 billion, $2.85 billion was raised by borrowing, $300 million as debt from group companies and $450 million from cash reserves.  The other leg of the transaction entailed paying a debt of $2.4 billion which existed in the B/S of Novelis. For this, Hindalco’s Dutch subsidiary, AV Minerals, raised bridge loan of $2.13 billion and $900 million.
  14. 14. What premium did Hindalco pay? Deal Price* BV/share EPS MPS(25Jan,07) Novelis $44.93 $2.6 ($3.71) $30 DP/EBITDA DP/EBIT DP/E Novelis 11.4 20.7 53.4 **Figures are based on financial data at the end of year 2005. ** * Effective date of deal- 15th May, 2007
  15. 15. Sources of Funding Sl. No. Source US $million 1 ABN AMRO 384.64 2 Bank of America 280.63 3 UBS (Singapore Branch) 280.00 4 Bank of India 185.53 5 ICICI Bank 180.26 6 Mizuho Corporate Bank 180.26 7 Deutsche Bank (Singapore Branch) 178.16 8 Citibank (Bahrain Branch) 175.00 9 Standard Chartered Bank 175.00 10 Sumitomo Mitsui Banking Corp 175.00 11 State Bank of India 170.00 12 Bank of Tokyo-Mitsubishi UFJ 150.00 13 BNP Paribas 135.53 14 HSBC 125.00 15 Rabobank 105.26 16 Calyon 100.00 17 Commonwealth Bank of Australia (Singapore Branch) 50.00 Total 3,030.27
  16. 16. POST-ACQUISITION Strategic Benefits & Challenges to Hindalco and Novelis Comparison of Pre- Acquisition and Post-Acquisition Periods
  17. 17. Post-Acquisition Strategic Benefits to Hindalco & Novelis  This acquisition of Novelis by Hindalco established the latter as a global integrated aluminium producer with low-cost alumina and aluminium production facilities combined with high -end aluminium rolled product capabilities. Hindalco emerged as the leading rolled aluminium products maker and the fifth -largest integrated aluminium manufacturer in the world. Acquiring Novelis also provided Hindalco ready access to its existing customers such as General Motors Corp., Aston Martin, Coca-Cola Co., etc.  Novelis gave Hindalco an entry into the down-stream value addition business of rolled aluminium products. Earlier, Hindalco was limited to the upstream business of mining bauxite and converting it into alumina, and then smelting it into aluminium. Also, Novelis had built a unique fusion technology that helped in increasing the formability of aluminium and products like sheet metal. The low weight –to-strength ratio had many applications in the auto industry, which was now advantageous to Hindalco.  About 35 mT of aluminium was consumed in 2006. About 40% of this was rolled aluminium products, where Hindalco had no presence. However, Novelis had a 19% world share, which was now acquired by Hindalco. It would have costed Hindalco US $12 billion to build assets that match Novelis’ s 29 plants in 4 continents with current production of 3.3 mT in 10 years, if Hindalco had taken the organic growth route.  Thus Novelis acquisition helped Hindalco gain quick access to new technologies and large production capacities without having made the efforts towards time-consuming R&D.
  18. 18. Post-Acquisition Strategic Benefits to Hindalco & Novelis  Novelis formed a natural hedge for Hindalco. The latter was charging a higher profit margin when aluminium prices were high on the LME and vice-versa. Thus, Hindalco’s rise and fall in profits depended directly on the aluminium prices on the LME. This was not the case with the aluminium rolling business of Novelis, which usually has a constant margin. After its loss-making can contracts expired in 2010, the Novelis business model and profitability became LME independent and a steady cash flow was earned.  Novelis was the global leader in aluminum rolled products and especially, aluminum can recycling, with a global market share of about 19 %. The deal gave Hindalco a strong presence in the business of aluminium recycling as it is infinitely recyclable and requires only 5% of the energy needed to produce primary aluminium.
  19. 19. Post-Acquisition Strategic Challenges to Hindalco & Novelis  Novelis profitability was significantly affected by the inability to pass through metal price increases due to metal price ceilings in certain of the company’s sales contracts till 2009. But by January 2010, all the sales contracts got expired and profitability will increase substantially from then onwards, due to new contracts  The debt component of Novelis stood at US $2.4 billion and additional US $2.8 billion was taken by Hindalco to finance the deal. This will put tremendous pressure on profitability due to high interest burden, in light of Hindalco’s expansion plans consisting of various Brownfield & Greenfield projects costing Rs. 25,000 crore.
  20. 20. Post-Acquisition Performance of Hindalco 2006-07 2007-08 2008-09 2009-10 D/E Ratio 0.66 1.87 1.8 1.11 EPS 26.73 17.04 3.21 22.17 ROE 20.96 13.76 3.07 18.22 Current Ratio 1.93 2.07 2.9 1.44 0 5 10 15 20 25 30 2006-07 2007-08 2008-09 2009-10 D/E Ratio EPS ROE Current Ratio
  21. 21. Post-Acquisition Performance of Hindalco
  22. 22. Post-Acquisition Performance of Novelis 2006-07 2007-08 2008-09 2009-10 D/E Ratio 13.14 0.73 1.8 1.4 ROE -141 -3.32 -134 21.66 Current Ratio 1.2 1.3 1.1 1.5 -160 -140 -120 -100 -80 -60 -40 -20 0 20 40 2006-07 2007-08 2008-09 2009-10 D/E Ratio ROE Current Ratio
  23. 23. Comparison of Pre-Acquisition and Post-Acquisition Periods Pre-Acquisition Rs. Crore Post-Acquisition Rs. Crore 2004-05 2005-06 2006-07 CAGR 2007-08 2008-09 2009-10 CAGR Hindalco ROE 16.79 16.85 20.96 7.67 13.76 3.07 18.22 9.81 Net Sales 10105 12120 19316 24.11 60013 65963 60722 0.39 Net Profits 1285 1580 2686 27.86 2387 484 3925 18.03 Novelis ROE 8 19.4 -141 -360.24 -3.32 -134 21.66 -286.86 Net Sales 33976 37678 43694 8.32 39730 51851 39149 -0.49 Net Profits 214.8 378.5 -1219.9 -277.71 -467 -9731 182 -173.04 Dates 27/12/2004 30/12/2005 28/12/2006 31/3/2008 31/3/2009 31/3/2010 Exchange Rate 43.84 45.07 44.36 39.97 50.95 45.14
  24. 24. THANK YOU

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