Hindalcos Acquisition of

Novelis:
The making of a giant
Group 11 Sec B
Partha P. Chowdhury- PGP/17/099
Parvathy Rajan- PGP/17/100
Pooja Punjabi PGP/17/102
Sandesh A PGP/17/109
Sonia Manglani PGP/17/114

INDIAN ALUMINUM INDUSTRY

Aluminum metal is used in transportation
packaging, building, construction, automobiles and
electrical conductors
Aluminum industry is divided into:

Primary
Aluminum
Industry

High capital cost requirements

Restricted access to technology

Secondar
y
Aluminum
Industry

Purchase primary metals from domestic

producers or imported it and processes
further at their plants
Low capital investment and low
dependence on technology
High input cost as it is dependent on
expensive imported aluminum

HINDALCO INDUSTRIES LIMITEDTIMELINE

2004-Initiated
the process of
merging Indal
and Hindalco.

2003-Acquired Nifty
Copper Mines through
ABML
Majority stake holder in
2000-Acquired Utkal Alumina
54.6% stake in JV with Alcan and
Indal, a leader increased its equity
in Alumina and stake in Indal to 96.5%
semi-fabricated Divested 8.6% of its
business.
holdings in Indo Gulf
Fertilizers Ltd.

2005-Set-up
world class
aluminum
project in
Orissa
Split its shares
in the ratio
10:1 in order
to enhance
liquidity

2006-Entered
into a JV with
Almex, USA for
manufacture of
high strength
aluminum alloys
March 2006:
Acquired an
aluminum rolling
mill and wired
rod facility from
Asset
Reconstruction
Company
May 2006: JV
with Essar
Group to
develop and
operate coal
mines at Mahan
MP

NOVELIS- PRIOR TO ACQUISTION

World leader
in the
recycling of
used
aluminum
World leader in beverage
Aluminum
cans
rolling,
producing
around 19% of
the worlds flatrolled aluminum
products

Highest
quality
aluminum
sheet and foil
for customers
in high value
markets
including
automotive,
transport,
packaging,
construction
and printing

Committed
to provide
innovative,
customerdriven
solutions
and world
leading
research &
technology
support

BUSINESS COMPARISON- HINDALCO

AND NOVELIS
HINDALCO

NOVELIS

Revenue

$2.635 bn

$9.849 bn

Business

Alumina and Aluminum

production, bauxite
mining, Copper mining

Aluminum rolled
product segment,
recycling metal, high
quality aluminum sheet
and foil products

Strengths

Lowest cost producer of

aluminum, totally
integrated facility,
reliable supplier of quality
products, diverse product
mix, extensive
distribution network and
customer support

Advanced scientific
techniques, Global
technology organization for
highest quality products,
innovative and customerdriven solutions

WHY SHOULD NOVELIS FAVOUR THE

AQUISITION
1.Suffered a huge loss of $170 mn in
2006 September.
2. Fixed price contracts hampering its
profit margin
3.Unfavourable currency movements
4.Higher transportation and energy
costs
5.A premium of 16.6% being offered by
Hindalco for its shares

WHY SHOULD HINDALCO FAVOUR THE

AQUISITION
SYNERGIE
S
Hindalco
Novelis
deal

WHY SHOULD HINDALCO FAVOUR THE

AQUISITION
1.Technical economies of Scale.
2. Administrative economies of scale, Forward
integration with Novelis
3.Reduction in uncertainty from fluctuating
Aluminum prices in the LME
4.Improved product quality due to better
technology from Novelis
5.Price discrimination through vertical
discrimination
6.Hindalco will get a strong Global footprint and
emerge as the largest rolled Aluminum products
maker

WHY SHOULD HINDALCO FAVOUR THE

AQUISITION
7. The deal would give Hindalco a strong
presence in recycling of aluminium business
8. Access to new set of customers Coca Cola,
Budweiser, Ford, GM, Audi, BMW
9. The replacement value of Novelis was US $12
billion, so considering the time required and
replacement value; the deal was worth for
Hindalco.

PRODUCTION SYNERGIES
Hindalco and Novelis: Production/capacity
Hindalco FY 2006

Novelis CY 2005

11,60,000

1,35,000

Primary Aluminium
Production

4,29,140

1,09,000

Rolled products Production

1,77,571

28,73,000

Primary Aluminium purchased

22,74,000

Aluminium Recycled

9,00,000

Capacity of Alumina Refinery

HAD HINDALCO ERODED THE VALUE TO ITS

SHAREHOLDERS?

HAD HINDALCO ERODED THE VALUE TO ITS

SHAREHOLDERS?
Hindalcos EPS will be diluted by 18%.( 25.5 in 2006-2007 to 20.94 in 20072008)
Though acquisition increased Hindalcos net sales by 213% over the
previous years , increased debt could erode profitability
Adverse changes in currency exchange rates could negatively affect the
financial results and the competitiveness of companys aluminium rolled
products relative to other materials.
Share price fell ( from as high as Rs. 199 to Rs. 120-130 )
Acquistion was done based on Noveliss financials for 2005 and not 2006 in
which it had reported losses
High leverage may affect Hindalcos expansion plans and the deal would
create value if Hindalco could meet its expansion plans and on expiry of
Noveliss fixed price contracts which impacted its ability to pass on price rise
to customers
Thus the deal appears to be over-valued

HAD HINDALCO ERODED THE VALUE TO ITS

SHAREHOLDERS?
It would take Hindalco atleast 10 years to create asset
capability on the downstream front
Hindalco believed that the acquisition was a good strategic
fit
The last of Noveliss fixed price contracts would end by 2010
The deal would put Hindalco amongst the top aluminium
producers in the world
Thus the deal would create advantages for Hindalco
But is the premium paid justified?

Post acquisition
changes
Novelis
Hindalco
Product mix improvements
and price increase
Benefit on non cash
unrealized gains
Reduction in selling, general
and administrative expenses
Reduction in exposure to
fixed price contracts

Net sales increased by

213%
Profit declined by 10.8%
Share price fell to 120130 range from 199

Reduced borrowing costs

All these resulted in net
income of $25 million

Announcement of rights
issue

DEAL VALUATION
According to the financial analysis, the fair price for the deal
was found to be $4.98 billion whereas the actual price paid
was $6 billion
Thus, the deal is overvalued
Also, the synergy between the two companies has been
found to have a negative value - $19730
However, this value was computed without taking into
account the long term effects like expiry of fixed price
contracts, expansion plans etc. These will effect the growth
rate of the cash flows and hence the values of the entities
involved in the transaction
In buying Novelis, the combined company would gain
significant synergies in supplying Noveliss customers

THANKYOU