Hindalcos Acquisition of Novelis

The case discusses the acquisition of US-Canadian aluminum

company Novelis by India-based Hindalco Industries Limited
(Hindalco), a part of Aditya Vikram Birla Group of
Companies, in May 2007. The case explains the acquisition
deal in detail and highlights the benefits of the deal for both
the companies.
It also examines the valuation of the acquisition deal and how
the deal was financed. The case concludes by describing the
challenges that Hindalco would face in integrating the
operations of Novelis and analyzing if the deal was
overvalued as opined by some industry experts.

Hindalcos Acquisition of Novelis

The acquisition will catapult the group into the Fortune 500 league, three years
ahead of the target. The combination of Hindalco and Novelis will establish a global
integrated aluminium producer.1
- Kumar Mangalam Birla, Chairman of Hindalco, in February 2007.
The combination of Noveliss world-class rolling assets with Hindalcos growing
primary aluminum operations and its downstream fabricating assets in the rapidly
growing Asian market is an exciting prospect.2

Ed Blechschmidt, Acting Chief Executive of Novelis, in February 2007.

Introduction
On May 16, 2007, India-based Hindalco Industries Limited (Hindalco), a subsidiary
of the AV (Aditya Vikram) Birla Group of Companies (Aditya Birla Group), acquired
the US-Canadian aluminum giant Novelis Inc. (Novelis). The acquisition was the
result of an agreement arrived at between Hindalco and Novelis on February 10, 2007.
Hindalco was to buy Novelis for US$ 6 billion in cash, making it the second biggest
acquisition3 by an Indian company till then. Novelis was to operate as a subsidiary of
Hindalco, and was to have Kumar Mangalam Birla (Kumar Mangalam) as Chairman
who was also the Chairman of Hindalco and the Aditya Birla Group. Martha Finn
Brooks would continue as Chief Operating Officer and was also appointed as the
President of the merged entity.
Hindalco was among the leading companies in the aluminum and copper industry in
the world. (Refer to Exhibit I for leading aluminum companies in the world based
on EBITDA figures). In the financial year 2006-07, Hindalco generated revenues of
US$ 14 billion and the company had a market capitalization of more than US$ 4.5
billion. It had a significant market share in all the segments in which it operated and
enjoyed a domestic market share of 42 percent in primary aluminum, 63 percent in
rolled products, 20 percent in extrusions, 44 percent in foils, and 31 percent in
wheels (Refer to Exhibit II for Hindalcos revenues and net income for the year
2006 and 2005).

Surojit Chatterjee, Birlas Hindalco Buys Aluminum Giant Novelis for $6.4 billion,
http://in.ibtimes.com, February 13, 2007.

Heather Timmons, Indian Metals Company to Buy Canadian Rival, www.iht.com,

February 11, 2007.

The biggest was Tata Steels acquisition of Corus, an all cash deal which was valued at
US$ 12.1 billion.

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Mergers & Acquisitions, and Strategic Alliances

Exhibit I: Leading Aluminum Companies in the World

(Based on the EBITDA percent)

60

50

50

39

40

39

34

30
16

14

20
10

lc
an
A

lc
oa
A

H
P
B

en
da
nt
a

nt
o

Ti

R
io

H
in

da
lc
o

Source: www.hindalco.com.

Exhibit IIA: Income Statement of Hindalco

(In Rs. Millions)

As on 31st March

2007

2006

Net sales and operating

revenues

183,130

2005

2004

2003

113,965

95,235

61,908

49,755

3,701

2,439

2,700

2,400

2,330

35,046

21,057

19,042

12,457

8,994

9,841

3,341

5,707

2,606

2,520

25,643

16,555

13,233

8,389

5,821

Other Income
Profit before Tax
Tax
Profit After Tax
Source: www.hindalco.com.

Exhibit IIB: Balance Sheet of Hindalco

(In Rs. Millions)

As on 31st March

2006

2005

Assets
Gross Block

103,323.21

87,119.09

67,435.15

55,808.73

Capital WIP

8,329.17

13,229.81

Investments

11,342.20

10,477.55

Inventory

40,950.88

23,745.18

Receivables

12,484.01

23,745.18

Other Current Assets

48,086.70

39,689.30

Net Block

362

Hindalcos Acquisition of Novelis

As on 31st March

2006

2005

188,628.11

150,824.24

985.66

927.77

Reserves

94,624.01

75,417.59

Total Debt

49,034.38

37,999.97

Creditors and Acceptances

19,745.30

14,573.87

Other current liab/prov

24,238.76

21,905.04

188,628.11

150,824.24

Balance Sheet Total

Liabilities
Equity Share Capital

Balance Sheet Total

Source: www.myiris.com.

Novelis had a three million ton capacity for manufacturing value added aluminum
rolled products4 and was a leading producer of aluminum sheet and light gauge (thin)
rolled products for the construction and industrial markets. The company operated in
11 countries and supplied high quality aluminum sheet and foil products to various
industries including automotive, transportation, packaging, construction, industrial
products, and printing. Noveliscustomers included companies like Coca-Cola,
Kodak, Ford, General Motors, and other leading Fortune 500 companies. Novelis sold
rolled aluminum products in Asia, Europe, North America, and South America (Refer
to Exhibit III for performance of Novelis in different regions).

Exhibit III: Performance of Novelis in Different Regions

(All US$ Millions)

N.America

Europe

Asia

S.America

Assets

1,487

2,392

1,021

814

Net sales

2,841

2,688

1,235

626

Regional
Income

64

208

70

122

10 Plants*,
2 Recycling
Facilities.

14 Plants,
1 Recycling
Facility

3 Plants

2 Plants,
2 Smelters,
1 Refinery,
2 Bauxite
Mine

Description
of Assets

* Plants refer to aluminum rolled product facilities.

Source: www.novelis.com.

Industry analysts opined that the acquisition would benefit Hindalco by strengthening
the companys global presence, as Novelis had flat rolled aluminum manufacturing
plants in different locations in the world. They considered the deal a good platform for
4

Aluminum rolled products are semi-finished aluminum products that constitute the raw
material for manufacturing finished goods ranging from automotive bodies to household
foils.

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Mergers & Acquisitions, and Strategic Alliances

Hindalco to access global customers. Novelis had a 19 percent global market share in
foil products, 25 percent in construction and industrial products, and 43 percent in
beverage cans. After the acquisition, the merged entity would emerge as the worlds
largest aluminum rolling company and among the worlds top five aluminum
manufacturers. According to Shivanshu Mehta, Assistant Vice-President, NCDEX,
The deal will catapult Hindalcos flat rolled product capacity from 0.2 million ton to
3.2 million ton per annum and elevate the company to a leadership position in the
business.5
Some analysts, however, were of the view that the deal was not beneficial to
Hindalco as it had paid a huge amount in cash to acquire a company which was
recording losses. Novelis had incurred a loss of US$ 275 million for the year 2006.
Even in the year 2005, when Novelis had reported US$ 90 million as net profit, its
share price did not cross US$ 30 (Refer to Exhibit IV for Novelis and Hindalco
stock charts). The analysts pointed out that the way the deal was financed would
affect Hindalcos financial performance as the acquisition would not add value in
the short and medium term.

Exhibit IV
Novelis Stock Price Chart (January 2005 May 2007)

Source: www.bigcharts.com.
Contd

Suresh P Iyengar, Hindalco Deal May Not Impact Aluminum Prices, The Hindu Business
Line, February 13, 2007.

364

Hindalcos Acquisition of Novelis

Contd

Hindalco Stock Price Chart (December 2006 May 2007)

Source: www.economictimes.com.

The deal included writing off Novelis debt, which would increase Hindalcos debtequity ratio. According to Karvy Stock Broking, Hindalcos consolidated earnings for
the year 2008 would come down due to the losses that Novelis had incurred.
Moreover, the interest on the loan which was taken for funding the acquisition would
also affect Hindalcos profits.

Background Note
Hindalco Industries Limited
The Birla Group of Companies was founded by Seth Shiv Narayan Birla in 1857 as a
cotton trading company at Pilani, Rajasthan, India. The group later expanded its
operations into other business segments (Refer to Exhibit V for other business of Birla
Group). Hindustan Aluminum Corporation Limited (HACL) was established on
December 15, 1958, to manufacture alumina, aluminum, and aluminum fabricated
items. The company was formed as collaboration between Kaiser Aluminum &
Chemicals Corporation (KACC), US, and the Birla Group. Under the agreement with
KACC, KACC had to train the people of HACL and provide technical advice and
information for 20 years along with the assistance to operate the aluminum fabrication
plant.

Exhibit V: Other Businesses of Aditya Birla Group

Grasim Industries Ltd.: A subsidiary of the Aditya Birla Group of Companies, it
is one of the largest private sector companies and comprises Viscose Staple Fiber
(VSF), Cement, Sponge Iron, Chemicals and Textiles. It was established in 1947 as
a small rayon weaving company in Gwalior, Madhya Pradesh.
Contd

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Mergers & Acquisitions, and Strategic Alliances

Contd

Aditya Birla Nuvo: Formerly known as Indian Rayon & Industries Ltd., it is a
diversified conglomerate of the Aditya Birla Group. Its business segments include
Viscose Filament Yarn (VFY), carbon black, branded garments, fertilizers, textiles,
and insulators. Aditya Birla Nuvo through its subsidiaries and joint ventures
provides services such as Life insurance, Telecom, Business Process Outsourcing
(BPO), IT services, Asset Management, and other financial services.
Ultra Tech: UltraTech Cement Limited is a Grasim subsidiary that manufactures
and markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement, and
Portland Pozzolana Cement. It is the countrys largest exporter of cement and
clinker. It exports to countries around the Indian Ocean, Africa, Europe, and The
Middle East. The Narmada Cement Company is a subsidiary of the company.
Source: www.birlagroup.com.

As a result, the HACL was set up as an integrated complex with a capacity of 20,000
MTPA (million ton per annum). It started producing aluminum metals in 1962 in
Renukoot in eastern Uttar Pradesh. Renukoot had a fully integrated plant, comprising
three main plants i.e. the Alumina, Smelter, and Fabrication Plants.
In 1965, HACL installed an extrusion press and rolling mill for the production of
aluminum sheets and rolled products with a capacity of 2,000 ton and 7,000 ton
respectively, thereby increasing the total capacity of the fabrication plant to 15,000
ton per annum. The company could produce 60,000 ton of primary metal. After
several modifications to the plant in the year 1968, the companys production capacity
was enhanced to 200 ton per day.
In 1967, HACL established its own power plant in Renusagar, in collaboration with
Renusagar Power Company Limited (RPCL). All of RPCLs assets were merged with
that of HACL. In the year 1986, the company raised its capacity from 120,000 ton to
150,000 ton of aluminum per annum. As part of a policy, the Kaiser Group divested
itself of its holdings in various corporations worldwide where it had a minority
interest and in the process it decided to disinvest its holdings in HACL also. In the
year 1988, the Kaiser Group had sold off all its shares at a premium to the
shareholders of the company and to the employees of the company.
On October 09, 1989, HACL was renamed Hindalco. In 1992, RPCL, which had been
a wholly-owned subsidiary of Hindalco, was merged with the company. In the mid1990s, with a view to leveraging on its core strengths, Hindalco started exploring the
possibility of setting up an integrated aluminum complex in Orissa. Subsequently, it
signed an MOU with Orissa Mining Corporation for the transfer of bauxite deposits.
The project was named Aditya Aluminum.
In the year 1997, HACL announced a technical collaboration agreement with the
Stahlschmidt & Maiworm Gmbh6 of Germany for the establishment of an aluminum
alloy wheel plant at Silvassa Capital of Dadra and Nagar Haveli Union Territory in
western India. The company went for expansion and modernization of an aluminum
alloy wheel plant in the domestic market. After the establishment of the plant,
Hindalco became the countrys largest integrated aluminum company, surpassing
6

It is one of the leaders in alloy wheels industry with plants in Germany, South Africa,
Poland, and the US.

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Hindalcos Acquisition of Novelis

Indian Aluminum company Limited (Indal) 7. In the year 1999, Hindalco acquired
19,38,900 shares of a public sector major, the National Aluminum Company Limited
(Nalco)8, through one of its investment subsidiaries.
In the year 2000, Hindalco acquired a 74.6 percent equity stake in Indal, an Alcan
Canada Group Company, which had a major presence in aluminum products and was a
leader in specialty alumina chemicals. Indal became a subsidiary of Hindalco. Indals
strength in alumina and downstream9 products complemented Hindalcos strong
presence in metal. Indal was among the worlds lowest cost aluminum producers.
In early 2005, all Indals businesses, except for the Kollur foil plant10 in the southern
Indian state of Andhra Pradesh, were merged with Hindalco. Later, in April 2005, the
company signed an MoU with the governments of Orissa and Jharkhand, states in eastern
India, for setting up a Greenfield alumina and aluminum facility in those states this helped
Hindalco to increase the alumina and aluminum capacities to much higher levels.
By 2007, Hindalco was primarily involved in production of aluminum and semifabricated products. The company operated in three segments: aluminum, copper and
other precious metals. Hindalco was the leading producer of aluminum in India (Refer
Exhibit VI for a note on the aluminum industry in India). The products of the group
included primary aluminum ingot, alloy ingot, billet, cast slab, wire rods, redraw rods,
alloy rod, foils, and sheet product. The copper business comprised production and sale
of copper in the form of cathodes and continuous cast rods and by-products and other
precious metals. Hindalcos stock was publicly traded on the Bombay Stock Exchange,
the National Stock Exchange of India Limited, and the Luxembourg Stock Exchange.

Exhibit VI: Aluminum Industry in India

The Indian aluminum sector is characterized by large players like Hindalco and
National Aluminum Company (Nalco). India has the fifth largest bauxite reserves
with deposits of about 3 billion ton or 5 percent of the world deposits while its share
in world aluminum capacity rests at about 3 percent. However, the per capita
consumption of aluminum in India is extremely low at less than 1 kg as against nearly
25-30 kg in the US and Europe, 15 kg in Japan, 10 kg in Taiwan, and 3 kg in China.
Contd

10

Established in 1938, Indal started with Indias first aluminum sheet rolling mill at Belur,
near Kolkata, West Bengal. Indal has a nationwide spread of plants and mines, operating
through all stages of aluminum value chain from bauxite mining, alumina refining,
aluminum smelting with captive power to downstream sheet and foil rolling and extrusions.
Nalcos activities include exploring, producing, manufacturing, and distributing aluminum
and related aluminum products. The company operates in two segments Aluminum and
Chemicals. The Aluminum segment includes aluminum ingots, wire rods, billets, strips and
other related products. The Chemicals segment includes calcined alumina, alumina hydrate
and other related products. It also produces Bauxite and power.
Downstream is closer to the point of sale than to the point of production or manufacture.
Companies in this case are involved in further processing the output of an upstream
company to produce different products and sell them in the market as end products.
The Indal Kollur foil plant was originally a part of Annapurna Foils Limited, the largest
manufacturer of aluminum foil in south India. The company was acquired by Indal in 2001
and later merged in April 2002. The plant has the technology from the world-renowned Fata
Hunter of Italy. It is located in Kollur village, Hyderabad, in Andhra Pradesh.

367

Mergers & Acquisitions, and Strategic Alliances

Contd

In the past decade, the primary aluminum producers were Bharat Aluminum
(BALCO) and NALCO in the public sector and Indian Aluminum (INDAL),
Hindalco, and Madras Aluminum (MALCO) in the private sector. However, Indal
merged with Hindalco and MALCO was acquired by Sterlite industries.
Consequently, there are only three main primary metal producers in the sector.
With liberalization, the prime strategies were joint venture investments, technology
acquisition/offers, international marketing tie-ups; buy-back arrangements and
subcontracting, technical, managerial, and marketing expertise. As a part of reform,
several policy changes have been expressed to ensure hassle free entry of private
investments. Similarly, as part of moving toward privatization, the government has
withdrawn its presence from as many areas as possible, through closure and sale of
equity or disinvestments.
As a result of the process of liberalization of trade in aluminum, India has emerged
as a net exporter of aluminum, on competitive terms. Government monopoly, in
terms of aluminum production and removal of price and distribution control over
aluminum has been diluted in favor of the private sector. The ownership pattern in
the private sector has undergone changes.
Compiled from various sources.

Novelis
Novelis was split from its parent company, Alcan Inc. (Alcan), the Canada-based
aluminum giant and set up as its subsidiary in January 2005. The origin of the
company can be traced back to 1902 when the Northern Aluminum Company, a
Canadian subsidiary of the Pittsburgh Reduction Company was set up. The Pittsburgh
Reduction Company was renamed as the Aluminum Company of America (ALCOA)
in the year 1907. In 1925, The Northern Aluminum Company was renamed the
Aluminum Company of Canada (ACOC) Limited. In 1928, when ALCOA started
disinvesting its funds from outside the United States, a Canadian holding company
called Aluminum Limited (AL) was formed to control the operations. This then
became the parent company of ACOC.
During the 1930s and 1940s, ACOC witnessed significant business growth as
smelting11 and hydroelectric units and fabricating plants were built in the UK and
Canada. In 1939, during the Second World War, the demand for aluminum for the
manufacture of aircraft for the military increased dramatically in Canada, the UK, and
the US. In 1945, ACOC registered the trade name ALCAN. In order to meet the
demand for aluminum, the company concentrated on hydroelectric sites to increase
annual smelter production to nearly five times the existing 500,000 tons and fabricated
plants to produce sheet and other components for the aircraft. After the war, Alcan
expanded its power and smelter capacity.
In the year 1965, the company acquired Central Cable Corporation and, in 1966, the
Metals Disintegrating Corporation. After the acquisition, the Central Cable
Corporation was renamed as the Alcan Cable Corporation and the Metal
Disintegrating Corporation as the Alcan Metal Powders Inc. The acquisition brought
about an increase in the smelting capacity to almost one million tons, which was
11

To melt or fuse to separate the metallic constituents.

368

Hindalcos Acquisition of Novelis

nearly double the existing capacity. In the year 1966, AL was renamed as Alcan
Aluminum Limited (AAL). In the 1970s and 1980s, AAL expanded its operations
internationally by increasing the capacity of the fabricated products and smelting
operations in Australia, the UK, Brazil, and India.
In the early 1980s, taking advantage of the restructuring in the international aluminum
industry, AAL acquired The British Aluminum Company Plc 12 and the Atlantic
Richfield13 company in the US. Thereby, it increased its presence in the markets for
fabricated products. In 1987, as a result of corporate restructuring, ACOC, which was
the principal subsidiary became the parent company and was also called AAL.
In the early 1990s, there was a global depression in the prices of metals due to which
the company disinvested from its downstream businesses in Argentina, Australia,
Brazil, Canada, New Zealand, the UK, the US, and Uruguay. The company also
restructured its operations in Japan, China, and Southeast Asia. In 2000, AAL
expanded its packaging business and acquired Alusuisse 14, thereby becoming the
worlds leading supplier of aluminum-based automotive products, lightweight
engineered products, and Alusuisses specialty packaging. In 2001, the company was
renamed Alcan to reflect the companys diversified product mix and global character.
In the year 2003, Alcan acquired French aluminum company Pechiney. The merger
combined the assets of both companies, which included bauxite mines, plants to
produce primary aluminum, and rolling mills to produce flat rolled products. The
merged entity supplied products to customers like Coke and Pepsi for cans and to the
manufacturers of automotive components.
In 2004, Alcan split the major activities of Pechiney to hive off its rolled aluminum
products business into a new organization called Novelis. The company was primarily
set up for can recycling and aluminum rolling in January 2005. The rolled aluminum
was made up of a variety of alloy mixtures that were hard, thick, and of appropriate
widths with various coatings designed specially for its end users. It started operations
with 37 operating units in 12 countries with more than 13,500 employees.
Novelis inherited a debt of US$ 2.9 billion from its parent company and suffered
losses. The company bought primary aluminum from Alcan and processed it into
rolled products. In mid-2005 and in 2006, the company signed price ceiling contracts
with some soft drink manufacturers to supply aluminum products at a specified price.
Due to these contracts, the company was forced to sell at a price lower than the raw
material costs though the price of aluminum increased subsequently. This affected
Novelis business. The company incurred a loss of US$ 350 million in the year 2006.
Other reasons for the loss were higher energy and transportation costs; adverse effects
of currency exchange rates; and expenses related to the companys restatement and
review process.

12

13

14

The aluminium producer British Aluminium Limited was originally formed as the British
Aluminium Company Limited on May 07, 1894 and when ALCAN bought it in 1982, it was
known as British Alcan Aluminium Plc.
Atlantic Richfield is an American oil company that was formed by the merger of the Eastcoast based Atlantic Refining and the California-based RichField Petroleum, in 1966.
It is a Switzerland-based aluminum company that produces rolled iron products for trucks
and coaches and rough ingots for the food and pharmaceuticals industry. After
amalgamation, it was called the Alcan Aluminum Valais SA.

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Mergers & Acquisitions, and Strategic Alliances

In 2006, Novelis restructured its European operations and sold its aluminum rolling
mill in Annecy, France. This was considered as an important step as it helped the
company to focus on its core business and improve its competitiveness in the
European market.
Novelis marked the year 2006 as an innovation year with the introduction of Novelis
Fusion technology, a new process through which multiple alloy layers can be cast into
a single aluminum rolling ingot simultaneously. Fusion Technology increased the
formability15 of aluminum and made the metal suitable to use and to make sheet metal
that helped in building cars with more curves. It increased the use of the strong and
light metal in the automotive industry. Novelis was the first company to start
commercial production of multi-alloy aluminum ingots.
As of February 2007, Novelis operated in 11 countries with 12,900 employees. The
company was organized under four operating segments Novelis North America,
Novelis Europe, Novelis Asia, and Novelis South America (Refer to Exhibit VII for
Novelis Operating Segments). Novelis operated six aluminum recycling units for
producing aluminum sheets and foils. It recycled used aluminum such as beverage
cans; scrap from internal operations, and from customers production plants. Novelis
catered to automotive, transportation, packaging, construction, industrial, and printing
markets by supplying aluminum sheets and foil products. Its shares were listed on the
New York Stock Exchange and the Toronto stock exchange.

Exhibit VII: Novelis Operating Segments

Novelis North America: This segment manufactures aluminum sheet and light
gauge products for beverage cans, containers and packaging, automotive and
transportation applications, building products, and other industrial applications.
Most of the recycled material is from used beverage cans and the material is casted
into sheet ingots for North Americas can sheet production plants.
Novelis Europe: It provides value-added sheet and light gauge products through 14
plants. The company supplies sheets for building products such as roofing, siding,
panel walls, and shutters. Novelis Europe is a leader in the production of lithographic
sheets. It has the largest beverage can recycling plant at Latchford, UK.
Novelis Asia: It operates through Novelis Korea Limited and Aluminum Company
of Malaysia. Together, they operate three manufacturing units in the Asian region.
The Korean company provides its products to the Asia/Pacific region for
construction, industrial and beverage can markets. The Aluminum Company of
Malaysia is a publicly traded company catering to the Southeast Asian markets. It
operates a continuous casting, rolling, and coating operations.
Novelis South America: It operates two rolling plants and primary production
units in Brazil. It manufactures various aluminum rolled products, including can
stock, automotive and industrial sheets, and light gauge for the beverage & food
can, construction & industrial, and transportation. The companys rolling and
recycling facility in Brazil is the largest aluminum rolling and recycling unit in
South America.
Source: www.novelis.com.

15

Formability is the capacity of the material to able to bend, stamped or shaped into the
required form.

370

Hindalcos Acquisition of Novelis

The Deal
Hindalco acquired Novelis through its wholly owned subsidiary AV Metals16 on February
10, 2007. AV Metals purchased 100 percent of the issued and outstanding common shares
of Novelis at US$ 44.93 per share, amounting to US$ 3.6 billion. Hindalco paid a
premium of 16.6 percent on the closing price of Novelis stock. Apart from equity
purchase, Hindalco also acquired Novelis debts to the tune of US$ 2.4 billion.
The amount of US$ 3.6 billion was financed through borrowings, debts from group
companies, and internal cash reserves. Of the total amount, US$ 2.85 billion was financed
by AV Metals through loans taken from three financial institutions UBS,17 ABN
Amro18, and Bank of America19. US$ 300 million was brought in by Essel Mining20, a
closely held group company, and US$ 450 million was mobilized by Hindalco.
The debt of US$ 2.4 billion was to be taken by Hindalco into its books. The company
planned to repay the debt through the cash flows of Novelis.
Hindalco had to get the approval for the deal from 66.66 percent of Novelis
shareholders. According to Canadian law on mergers and acquisitions, if a company
secured 66.66 percent approval, then the remaining shareholders had to sell their
shares at the price agreed upon. However, if the company did not receive the required
approval, it had to quit the deal.

Rationale for Acquisition

After the deal was signed for the acquisition of Novelis, Hindalcos management
issued press releases claiming that the acquisition would further internationalize its
operations and increase the companys global presence. By acquiring Novelis,
Hindalco aimed to achieve its long-held ambition of becoming the worlds leading
producer of aluminum flat rolled products. Hindalco had developed long-term
strategies for expanding its operations globally and this acquisition was a part of it.
Novelis was the leader in producing rolled products in the Asia-Pacific, Europe, and
South America and was the second largest company in North America in aluminum
recycling, metal solidification and in rolling technologies worldwide. Novelis had the
most modern technology in the industry and efficiently produced high-quality
products in several countries across the world. While combining the assets of both the
16

17

18

19

20

AV Metals is the AV Birla Groups Canada-based SPV which is a subsidiary of Hindalco

and was created to fulfill specific or temporary objectives, primarily to isolate financial risk,
usually bankruptcy but sometimes for a specific taxation or regulatory risk.
UBS is a global financial services firm offering wealth management, investment banking, asset
management, and business services to the clients. In Switzerland, UBS is the market leader in
retail and commercial banking. The banks net profit for the year 2006 was US$ 9097 million.
ABN Amro is one of the leading banks in Europe and has operations all over the world. It
was a result of the merger of Alegemen Bank Nederland (ABN) and AmsterdamscheRotterndamsche Bank (AMRO). In April 2007, Barclays announced the deal to buy ABN
Amro. The company recorded a profit of euro 4780 million.
It is the largest commercial bank in America in terms of deposits. Prior to 1993, it was
called Nations Bank and in 1998, it merged with the San Francisco-based Bank America
and the name was changed to Bank of America. For the year ended 2006, it recorded US$
74247 million as revenues and a net income of US$ 21133 million.
Established in 1950, it is one of Indias largest iron ore mining companies and part of the
Aditya Birla group. It is the largest producer of noble ferro alloys like molybdenum,
vanadium, tungsten, and titanium with an annual mining capacity of over 5 million ton.

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Mergers & Acquisitions, and Strategic Alliances

companies, the merged entity could establish a global integrated aluminum producer
with low-cost alumina and aluminum production facilities along with aluminum rolled
product capabilities.
Hindalco, which had an upstream21 technology of mining bauxite and converting it
into alumina and then smelting it into aluminum, would benefit from the downstream
technology of Novelis which produced a variety of aluminum products from the raw
aluminum. Kumar Mangalam said, In aluminum, one needs to invest in downstream
to go up the value chain and India does not offer suitable downstream investment
opportunities of a global scale.22 Novelis had a downstream product capacity of 3.0
million tons while Hindalco had approximately 500 kilo tons. In this context, Debu
Bhattacharya, Managing Director of Hindalco, said, If we earn $10 for every $100 of
aluminum we sell, we will now be able to earn another $10 for every $100 worth of
aluminum that Novelis processes into rolled products. 23
The deal was expected to fetch economies of scale to Hindalco in the long run by
reducing the costs and time spent in accessing raw materials and by catering to the
global customers of Novelis. The most important link between them was aluminum,
which was Hindalcos finished product and the raw material for Novelis.
Hindalco got its revenues from the sale of its raw metal aluminum, while Novelis
added value to the raw metal aluminum to come out with rolled aluminum products.
These products were used in several high technology applications like automobiles,
beverages, building and construction, etc. This helped Hindalco to capture the total
value chain in the aluminum business. Hindalco had another advantage
as the value
chain was already established; it could directly access the market at a lower freight
cost. Hindalco served one end of the value chain while Novelis served the other end.
By clubbing both, they could achieve greater economies of scale in the long run.
According to a research finding, nearly 35 million tons of aluminum was consumed
globally every year. Of that, 40 percent came from rolled products, in which Novelis
was a leading player with a 19 percent share. As Hindalco did not serve this segment,
the acquisition would help it gain access to this segment. In India, it was expected that
the aluminum rolled products market would grow from around 220,000 ton in 2006 to
1 million ton in few years. There was a huge demand for these products in Asian
regions, led by China; which contributed nearly 2.5 million ton of the total demand.
Novelis had highly sophisticated technology which would have taken Hindalco at
least ten years to develop. According to analysts, Novelis assets had a replacement
value of US$ 12 billion and Hindalco would take a long period to match these assets
in the four continents at its current production of 3.3 million ton. Donlad Marleau,
Primary Credit Analyst at Standard & Poor, commented, This deal is high-level
buying. Novelis is a strong acquisition because of the technology. 24 In his opinion, it
was difficult to get such technology and even harder to get customer certification.
21

22

23

24

Upstream is closer to the point of production or manufacture than to the point of sale. Companies
in this case are involved in the procurement and production of a particular product which is not by
itself the final product and which can be processed further for specific use.
Nandini Lakshman, Metal Merger: Indias Birla Thinks Big, www.businessweek.com,
February 11, 2007.
M.Anand, Hindalco-Novelis The (Scary) Untold Story, www.businessworld.com,
February 26, 2007.
M. Anand, Hindalco-Novelis The (Scary) Untold Story, www.businessworld.com,
February 26, 2007.

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Hindalcos Acquisition of Novelis

Apart from gaining technology, Hindalco would also have access to the contracts
which Novelis had entered into for the supply of can body (material for beverage
cans). These contracts would expire in January 2010. After 2011, Novelis can pricing
issues would have been solved and the management expected that it would generate
nearly 12 percent return on capital with an annual cash flow of US$ 400 million.
Hindalco would have more aluminum capacity by then and earn good returns on
investments as it planned to add new capacities in its plants which were closer to
Novelis plants in Malaysia and South Korea.
One of Hindalcos most important strategies in acquiring Novelis was to have an edge
over the London Metal Exchange (LME)25 prices. Although Hindalco was a low cost
producer of aluminum with good numbers on its balance sheet, it was still affected by
the fluctuations in the prices of aluminum set by the LME in the previous few years. If
the prices of aluminum came down in the near future, its profits were also likely to be
affected (Refer to Exhibit VIII for aluminum price fluctuations).

Exhibit VIII: Alumina and Aluminum Prices (2004-07)

(In US$ per ton)

Year*

Alumina

Aluminum

2004

490

1,700

2005

440

2,000

2006

640

2,900

2007

395

2,832

* In the beginning of the year.

Source: www.hindalco.com.

Hindalcos management believed that if it acquired a company that sold value-added

aluminum products then it might pass on the price fluctuations to the customers.
Though Hindalco had a presence in this value added segment it did not have the
required technology to have an edge. Hence, it acquired Novelis, which had the
largest share in the market. Novelis would add nearly Rs.415 billion26 of sales to
Hindalco with an addition of three million ton of aluminum products to its portfolio.

The Pitfalls
Though the Hindalco-Novelis merger had many synergies, some analysts raised the
issue of valuation of the deal as Novelis was not a profit-making company and had a
debt of US$ 2.4 billion. They opined that the acquisition deal was over-valued as the
valuation was done on Novelis financials for the year 2005 and not on the financials
of 2006 in which the company had reported losses (Refer to Exhibit IX for Novelis
P&L statements and balance sheets). They said that Hindalco might have to collect a
huge amount of resources to revive and restructure Novelis. Stewart Spector, an
aluminum industry consultant, opined, It seems to me that US$ 6 billion is an awful
big premium to pay for a messy operation 27

25

26
27

LME is the worlds premier non-ferrous metal market. It offers futures and options contracts for
aluminum, copper, nickel, zinc and lead. The exchange provides a forum for all trading activity.
In 2006, LME achieved volumes of 87 million lots, equivalent to $8,100 billion annually.
1 US$ = Rupees 41.04 as of August 17, 2007.
Surojit Chatterjee, Birlas Hindalco Buys Aluminum Giant Novelis for $6.4 billion,
http://in.ibtimes. com, February 13, 2007.

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Mergers & Acquisitions, and Strategic Alliances

Exhibit IX (A): Novelis Selected Financial Data

(In US$ Millions)

2006

2005

2004

9,849

8,363

7,755

Other Income

(82)

(299)

(62)

Interest Charges

206

194

48

Depreciation

233

230

246

Profit Before Tax

(278)

224

231

Net Income/Loss

(275)

96

55

Net Sales

Source: Novelis Inc., Annual Report, March 2007.

Exhibit IX (B): Consolidated Balance Sheet of Novelis

(In US$ Millions)

Assets

2006

2005

Current Assets
Cash and Cash equivalents

$ 73

$ 100

1,321

1,098

21

33

1,391

1,128

42

66

106

194

Total Current Assets

2,963

2,627

Property Plant and Equipment net

2,143

2,160

236

211

20

21

Investments in and advances to non consolidated affiliates

150

144

Fair value of derivative instruments net of current

portion

44

90

Deferred income tax assets

76

45

101

107

59

71

5,792

5,476

Accounts Receivable
-

Third Parties

Related Parties

Inventories
Prepaid expenses and other current assets
Current position of fair value of derivative instruments
Deferred income tax assets

Goodwill
Intangible Assets net

Other long term assets

-

Third parties

Related parties

Total Assets

Contd

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Hindalcos Acquisition of Novelis

Contd

LIABILITIES AND SHARE HOLDERS EQUITY

Current Liabilities
Current portion of long term debt

144

Short term borrowings

133

27

1,542
44

964
38

508

543

61

26

Total Current liabilities

2,432

1,601

Long term debt net of current portion

2,158

2,600

81

186

Accrued post retirement benefits

425

305

Other long term liabilities

343

192

5,439

4,884

158

159

Preferred stock

Common stock

398

425

(198)

92

(5)

(84)

195

433

5,792

5,476

Accounts Payable
-Third parties
- Related parties
Accrued expenses and current liabilities
Deferred income tax liabilities

Deferred income tax liabilities

Minority interest in equity of consolidated affiliates

Share holders equity

Additional paid in capital

Retained earnings (accumulated deficit)
Accumulated other comprehensive losses
Total share holders equity
Total liability and share holders equity
Source: Novelis Inc., Annual Report 2007.

After the deal, Hindalcos debtequity ratio was expected to slide down to 2:1 from
1:2. This was expected to further affect Hindalcos balance sheet. Analysts were
predicting a dilution in the EPS of Hindalco by 18 percent after the acquisition.
Further, the deal could reduce Hindalcos reserves, which were being used for funding
the deal. The profits would also be affected due to the interest on the debt borrowed.
The analysts therefore were of the opinion that the acquisition would dilute the
earnings of the company. Due to the massive expansion plans taken up by Hindalco,
Novelis would further push Hindalcos high gearing level 28. It was also estimated that
Hindalco would have to improve annual free cash flow by 35 percent to US$ 540
million for the acquisition to be considered as neutral.
28

Debt gearing level is the relationship between the long term liabilities of the business and
the capital employed. The idea behind calculating the ratio is to have a balance between the
shareholders funds and the long term liabilities.

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Mergers & Acquisitions, and Strategic Alliances

According to a report by Edelweiss Research 29 on Hindalco, the Novelis deal was
valued at 4.7 times EV/EBITDA30 for the financial year 2006-07 earnings. This
valuation had been done based on the debt and the earnings before accounting for all
non-cash items. It also did not take into account the price ceiling contracts. The report
stated that the deal seemed to be expensive for a non-integrated low margin business.
It also stated that the deal would dilute the 2007-08 financial years earnings by 12
percent, while the debt-equity ratio was expected to increase to (2.72:1 from 0.43) for
the same year. The key assumptions made by Hindalcos management while entering
into the deal was an increase in aluminum and copper prices, increase in metal
production, and higher backward integration related synergies
which were not
factored by Edelweiss Research into their estimates.
Industry experts pointed out that though Novelis had a leading global presence in
rolled aluminum products, it did not have much pricing power. This was because
Novelis had to face competition from strong players like Alcoa, Norsk Hydro, Alcan,
and Aleris who contributed nearly 53 percent of the global market share. In such a
scenario, to gain market share, Novelis had entered into can contracts till 2010 and
sacrificed its profits. Novelis was running into losses due to the can contracts.
A research note from Merrill Lynch speculating on the possibility of such a deal said
the negatives could outweigh the positives. Merrill analyst, Vandana Luthra, pointed
out that during periods of rising aluminum prices, margins were sharply squeezed, as
selling prices for finished product did not increase commensurately.
However, Hindalcos management felt that the deal would be beneficial for the
company in the long term and would allow it access to global customers. Kumar
Mangalam said, The complementary expertise of both these companies will create
and provide a strong platform for sustainable growth and ongoing success.31 He
added that the acquisition would lead Hindalco into the Fortune 500 companies list,
three years ahead of the target. Hindalco was expected to double its turnover to US$
20 million after the acquisition. After the acquisition was completed in May 2007,
Novelis became a subsidiary of Hindalco.
In mid-2007, Hindalco was planning a massive expansion of its operations by
increasing the capacity to 1.5 million tons by 2011-12. This would make Hindalco one
of the worlds fifth largest producers of aluminum, up from its position as 13 th largest
in 2007. Hindalco had formed a JV with Almex, US, to manufacture high strength
aluminum alloys for application in aerospace, sporting goods, and surface transport
industry.

29

30

31

India-based Edelweiss Capital Ltd offers investment banking, private placement of equity,
convertible debt, merger and acquisition advisory, and restructuring services. The company
is also involved in stock broking, distribution of financial products, and asset management
services. The company also provides market research services.
EV includes the cost of paying debt; EBITDA refers to Earnings before Interest Tax
Depreciation and Amortization. EV/EBITDA compares the value of the company free of
debt, to earnings before interest and tax. It is calculated without taking into account the cost
of assets or the effects of tax. EV/EBITDA is generally used to value shares, it is assumed
that debt (such as bonds) that has a verifiable market value is worth its market value. Other
debts may be assumed to be worth its book value (the amount shown in the accounts).
Surojit Chatterjee, Birlas Hindalco Buys Aluminum Giant Novelis for $6.4 billion,
http://in.ibtimes.com, February 13, 2007.

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Hindalcos Acquisition of Novelis

Suggested Readings and References:

1.

The Birth of Giants Alcan and Alcoa, http://www.alunet.net, 1999.

2.

Heather Timmons, Indian Metals Company to Buy Canadian Rival,

www.iht.com, February 11, 2007.

3.

Nandini Lakshman, Metals Merger: India's Birla Thinks Big,

www.businessweek.com, February 11, 2007.

4.

Hindalco to Buy Novelis for $6 Billion, www.forbes.com, February 11,

2007.

5.

Hindalco Industries Ltd. and Novelis Inc. Announce an Agreement for

Hindalcos Acquisition of Novelis for Approximately $6.0 Billion, www.
http://www.finanznachrichten.de/nachrichten, February 11, 2007.

6.

Birla buys US based metal major for $6 bn, www.rediff.com, February 12,
2007.

7.

Laura Mandro & Robert Daniel Novelis Shares Leap on $6 Billion Hindalco
Buyout, www.marketwatch.com, February 12, 2007.

8.

Novelis to add Rs 41,500 cr in Hindalcos Sales,

www.timesofinida.indiatimes.com. February 12, 2007.

9.

Hindalco to Acquire US-Based Novelis in $6-B All-Cash Deal,

http://www.thehindubusinessline.com, February 12, 2007.

10.

Surojit Chatterjee, Birlas Hindalco Buys Aluminum Giant Novelis for $6.4
billion, http://in.ibtimes.com, February 13, 2007.

11.

Suresh P. Iyengar, Hindalco may not Impact Aluminum Prices,

www.businessline.com, February 13, 2007.

12.

Flash note by HSBC on Hindalco Industries, www.hsbcnet.com, February

13, 2007.

13.

Role of Royalty in Hindalco Novelis Buy, www.minesandcommunitites.org,

February 14, 2007.

14.

Chidanand Rajghatta, Novelis Acquisition puts Indian Stamp on Coke,

Budweiser Can, www.timesofindia.indiatimes.com, February 14, 2007.

15.

Indian Economic News- Policy Update, www.indianembassy.org, February

15, 2007.

16.

M. Anand, Hindalco Novelis The Untold Story,

www.businessworldindia.com,
February 26, 2007.

17.

2007 Metal Industry News, www.metalcenternews.com, March 2007.

18.

Andrew Corn, Indian Conglomerate Buys Novelis, www.seekingalpha.com, April

19, 2007.

19.

Reduce Hindalco Industries: Edelweiss, www.moneycontrol.com, May 14,

2007.

20.

Novelis Now a Hindalco Subsidiary Acquisition Process Completed,

www.businesswireindia.com, May 15, 2007.

377

Mergers & Acquisitions, and Strategic Alliances

21.

Hindalco Industries Completes Acquisition of Novelis Inc., www.canstock.com,

May 15, 2007.

22.

Martha Finn Brooks Named President of Novelis Inc., http://biz.yahoo.com,

May 16, 2007.

23.

Crisil Downgrades Hindalcos NCDs, www.thehindubusinessline.com, June

17, 2007.

24.

www.bigcharts.com.

25.

www.wikipedia.com.

26.

www.novelis.com.

27.

www.hindalco.com.

28.

www.alcan.com.

29.

www.aluminum.org.

30.

www.economictimes.com.

31.

www.birlagroup.com.

32.

www.myiris.com.

33.

www.novelisrecycling.com.

378