Novelis to decide on Aleris buy today; investors jittery about $2.5-bn deal

The board of directors of Novelis, a subsidiary of Hindalco, is meeting on Friday to take a call on whether to go ahead with its proposed acquisition of Aleris Corp for $2.5 billion.

The acquisition of Aleris, a US-based aluminium rolling firm, if approved, will require additional fundraising, including via American depository receipts, by Novelis. “The board meeting will decide whether to go ahead with the transaction or not. The board will also decide how to raise funds for the acquisition. Whether to raise more debt or equity will be decided in the same meeting,” said a source close to the development. 

The transaction has to be cleared by the Hindalco board also. “The board may even reject the proposal for acquisition,” the source said.

Investors of Hindalco Industries, the country’s largest aluminium producer, however, were nervous about reports that the Aditya Birla group company is planning another overseas acquisition. On Thursday, Hindalco’s share price declined 6.5 per cent to close at Rs 198. Hindalco investors are a jittery lot as the stock has fallen 28 per cent this year as compared to a 7 per cent rise in the BSE Sensex.

A spokesperson for the Aditya Birla group declined to comment on the acquisition. In a statement to the stock exchanges, Hindalco said: “We wish to inform you that we constantly evaluate various options for creating long-term value for the shareholders. As and when such proposals are considered by the board, we notify the stock exchanges with all relevant details as required. At this point of time, no such proposals have been considered by the board which would trigger the disclosure of events or information under the SEBI regulations.”

According to analysts, the transaction is not attractive from valuation angle but is not bad either, considering it’s a ready asset in the North America market and is required for Novelis's growth.

“Acquiring Aleris at $2.5 billion is valuing the American company at eight times its one-year forward EV/Ebitda (enterprise value/earnings before interest, tax, depreciation and amortisation). In fact, this number is at the lower end of the rumour that has been going on for last 9-10 months,” said an analyst.

“We view it positive only, as one of the overhangs was usage of cash, which they may be using to acquire value-added business. According to us, the maximum amount overpaid is $400 million, which works out to be Rs 10 a share. Debt still will be at a comfortable level with probable net debt/Ebitda of 3.5 times,” said an IDFC analyst.

A JP Morgan analyst said the transaction could easily be funded via leverage as Novelis’s leverage currently stood at three times its net debt/Ebitda, which on a pro-forma basis would increase to 3.6 times after the transaction.

As on March 31, 2018, Hindalco Industries’ consolidated net debt (according to unaudited results) stood at Rs 513 billion, while debt to equity ratio was 0.93.

Analysts said Aleris’s acquisition would augur well for US-based Novelis as it would strengthen the downstream segment of its auto business. In FY18, Novelis contributed 62 per cent to consolidated revenue and 53 per cent to the company’s consolidated Ebitda.  

“The acquisition will lead to consolidation in the aluminium sector in the US. In addition, the two companies have synergies, especially in China. Novelis has a cold mill, while Aleris has a hot mill in China, which would help leverage,” said an analyst with a Mumbai-based brokerage on condition of anonymity.

In a bid to insulate itself from wagaries of aluminium prices on the London Metal Exchange (LME), the Aditya Birla group company has been working towards making it more of a conversion business (like copper where the company does not get impacted due to fluctuations in copper LME) and hence is laying thrust on downstream business expansion.

“Our aim is to get more and more into the downstream business of aluminium so that we remain insulated from volatility of LME prices. So we have plans to invest about Rs 50-60 billion towards aluminium downstream,” Satish Pai, managing director at Hindalco Industries, had said recently.

Since the acquisition of Novelis in 2008-09, Hindalco has invested in increasing its capacity of recycling aluminium, which was about 57 per cent in 2017-18 from 30 per cent at the time of acquisition of the mill.

Earlier, a Chinese company tried to take over Aleris but the US government did not give permission for it.

Why Aleris 
  • It's a ready asset for acquisition
  • Aleris, Novelis have synergies across the world
  • Novelis to have higher presence in downstream business like auto
  • The US firm will be insulated from LME volatility
  • Novelis, Aleris have complementary capacity in China

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