Merger & Acquisition (Hindalco & novelis)

Presenters 68-Gangadharan Ashwin 74-Kokate Tilottama 89-Shetty Akash 118-Chavan Akshata

Outline of the presentation

Facts of the deal Analysis of the case
Strategic Perspective Financials Perspective Cultural Perspective

Conclusion

INTRODUCTION

INDIAN ALUMINIUM INDUSTRY

Highly concentrated Major players:
Hindustan Aluminum Company (HINDALCO) National Aluminum Company (NALCO) Bharat Aluminum Company (BALCO) Madras Aluminum (MALCO) Indian Aluminum (INDAL)

5th largest aluminum producer - 2.7 million tones - 5% of the total aluminum production in the world. Per capital consumption around 1% , US & EUROPE: 25-30% Power, infrastructure and transportation account for almost 3/4th of domestic aluminum consumption.

PROCESS

HINDALCO
Structured into two strategic businesses Aluminium and Copper. Global footprint in 13 countries. The world's largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia. It enjoyed domestic market share of 42% In primary aluminium, 63 % in rolled products, 20 % In extrusion , 44 % in Foils & 31% in wheels. Annual revenue of US $14 billion. Market capitalization in excess of US $ 23 billion. The aluminum division's product range includes alumina chemicals, primary aluminium ingots, and billets, wire rods, rolled products, extrusions, foils and alloy. The copper plant produces copper cathodes, continuous cast copper rods and precious metals like gold, silver and platinum group metal mix. Brands: Everlast roofing sheets, Freshwrapp kitchen foil and Freshpakk semi-rigid containers.

NOVELIS
It was born in early 2005 as a result of a forced spin-off from its parent, the $ 23.6-billion aluminium giant and Canada-based Alcan. Novelis is the world leader in aluminium rolling, producing an estimated 19 percent of the world's flat-rolled aluminium products. The company recycles more than 35 billion used beverage cans annually. The company is No. 1 rolled products producer in Europe, South America and Asia, and the No. 2 producer in North America. Customers include major brands such as Agfa -Gevaert, Alcan, AnheuserBusch, Ball, Coca-Cola, Crown Cork & Seal, Daching Holdings, Ford, General Motors, Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull, Tetra Pak, ThyssenKrupp and others.

PROBLEMS WITH NOVELIS

On a net worth of $322 million, Novelis has a debt of $2.33 billion (most of it high cost). Thats a debt-equity ratio of 7.23:1 Simple business model Not to increase prices to win more customers Managements wrong judgement led to losses of $350 million (in 2006).

STRATEGIC FIT

Strategic Rational
Good strategic move from Hindalco Increasing scale of operation Entry into high-end downstream market Enhancing global presence Novelis a Global leader (in terms of volume) Access to customers such as General Motors Corporation and Coca-

Cola
Superior Technology

Strategic Rational
Combination of Hindalco and Novelis established integrated producer with

low-cost alumina and aluminium facilities combined with high-end rolling

capabilities and a global footprint. Joint entity became insulated from fluctuation of Aluminium prices. Deal gave Hindalco a strong presence in recycling of aluminium business.

Strong technology of Novelis benefited Hindalco.

FINACIAL FIT

Indian deal makers

Team Members Kumar Mangalam Birla Debu Bhattacharya, Managing Director, Hindalco

Sumant Sinha, Group CFO

Rounds of negotiation

Acquisition approval
Hindalco share plunged

Funding structure for the deal

100% Corus equity=$12.1 billion $8 billion- Debt strength of the Corus balance sheet $4.1 billion-Raised by the Tatas Tata-corus

Debt-equity ratio of 7.23:1 Novelis equity=$3.6 billion $2.85 billion- Borrowing $750 Million-Internal financing Novelis debt=$2.4-billion

HindalcoNovelis

Over all $3.5 billion in cash+$2.5 billion debt

Valuation for acquisition

Analysts research-Price too high Loss of US $170 million nine months ended 30 sep 2006 Latest guidance-Novelis management -loss of US $240-285 M 2006 2005 Novelis US $90 million net profit- Never share prices >US $30 So, why was Hindalco paying US $44.93 a share for a loss-making company? Management indicated a pre-tax profit of US $35 million-100 million for 2007 & Hindalco has long held an ambition

Valuation for acquisition

Market capitalization/profit before tax (PBT)

36(Noveliss 2007 forecast)

11.4x 20.7x 53.4x

PRICE/EBITDA PRICE/EBIT PE

After considering a total enterprise value of two firm, earnings and value dilution due to merger It was estimated that Hindalco need to improve annual free cash flow by 35% to US $540m for the acquisition to be value (NPV) neutral. Having already committed to significant expansion projects, Novelis will push Hindalcos high gearing levels even further. We calculate that Hindalcos gearing (ND/E) reach 236%

Stock price/volume movement at a glance

Exchange / Period Price (Rs.) Price (Rs.) Volume (in Mn.) Volume (in Mn.) BSE NSE BSE NSE Latest 161.30 161.00 1.78 4.55 30 days back 147.60 147.65 0.52 1.48 90 days back 134.20 133.95 1.23 2.43 1 yr. back 160.25 160.25 1.55 4.30

Four years after buying Novelis

Company three times its size. Return of capital represents almost 50 per cent. To replace an 18-month bridge loan. Equity value more than doubling. Over $1 billion in adjusted Ebidta.

CULTURAL FIT

Objective
To add downstream operations Adding value added products To remain globally competitive at home since India was not a protected market anymore. To steady the profit stream To gain new competencies.

Integration process
Hindalcos management allowed the post merger process to take place naturally and rarely intervened. Four step process 1. Finance integration 2. 3. 4. Organizational integration Business process integration Market integration

SEBI Norms

SEBI Guidelines (Takeover code)

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 - The minimum number of shares for which the offer is to be made - The minimum price at which the shares must be Acquired In the event the public shareholding in the Indian Company falls below the specified 10%, then 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 . 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

Procedure for Amalgamation / Merger /Take over.

Check MoA (change accordingly) Draft Scheme of Arrangement Consider it in Board Meeting Apply to Court direction to call General Meeting Send copy of application made to High Court to Central Gov & send notices of General Meeting to with scheme Notice Period shall not be less than 21 days At General Meeting approve scheme, increase authorized share capital , issue further shares, as required

Major Laws Involved

SEBI (substantial Acquisition of shares &Takeovers) Regulations 1997. The Securities and Exchange Board of India Act,1992 . Security Contract Regulation Act ,1956 . The Depositories Act,1956. SEBI Disclosure and Investor Protection Guidelines 2000. Securities and Exchange Board of India (Prohibition of Insider Trading Regulation ),1992. Securities and Exchange Board of India (Merchant Bankers) Rules/Regulation 1992. SEBI (Delisting of Securities )Guidelines,2003. Foreign Exchange Management Act,1999. Companies Act,1956.

Benefits
Post acquisitions, the company will get a strong global footprint After full integration, the joint entity will become insulated from the fluctuation of LME Aluminium prices Strong presence in recycling of aluminium business

Novelis has a very strong technology for value added products and its latest technology Novelis Fusion is very unique Less dependence on cost revenue business of hindalco

THANK YOU