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Presented by: Anand Mishra Jeewan Das Mohta Sansad Panigrahi Siddhartha Anand Sumit Kamra
Hindalco Novelis
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We look upon the aluminum business as a core business that has enormous growth potential in revenues and earnings,' 'Our vision is to be a premium metals major, global in size and reach .... The acquisition of Novelis is a step in this direction
http://www.slideshare.net/gagan3211/merger-acquisition-hindalco-novelis
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INTRODUCTION
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Electricity, coal and furnace-oil are primary energy inputs. Energy cost is 40% of manufacturing cost for metal and 30% for rolled products.
High cost of technology is the main barrier in achieving high energy efficiency.
Hindalco
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A flagship company of Aditya Birla Group - structured into two strategic businesses Aluminum and Copper.
$ 23 billion.
The aluminum division's product range includes alumina chemicals, primary aluminum ingots, and billets, wire rods, rolled products, extrusions, foils and alloy.
The company reduced has SG&A costs from 4.15% to 2.96% and led to
Novelis
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product marketplace.
The US and European anti-trust proceedings ruled that the rolled products business of either Alcan or Pechiney had to be divested from the merged entity.
Novelis
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46 Operations in 13 countries
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STRATEGIC FIT
Hindalco Strategy
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Presence in two fastest growing non ferrous metal Segment Al and Cu Aluminium : Integrated Operations Copper : Partial Integration
Aluminium Build low cost upstream Buy High end downstream Global presence Copper World class operations Reduced volatility
Simple business model buying primary aluminium, process and selling to customers such as Coke and Ford. Wrong management decision led to losses of $350 million (in 2006). Inefficiency of the management and finance team. Novelis ended up inheriting a debt mountain of almost $2.9 billion on a capital base of less than $500 million
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Novelis processes primary aluminum to sell downstream high value added products, this is what Hindalco manufactures, So perfect Marriage. Novelis had a capacity to produce 3 million tonne while Hindalco has a capacity of 2,20,000 tonne. It would have taken a minimum of 8-10 years for Hindalco for building these facilities. Hindalco got the fusion technology of Novelis which increased the formability of aluminium. As per company details, the replacement value of the Novelis was $12 billion, so considering the time required and replacement value; the deal was worth for Hindalco. The immediate effect of the merger is that Hindalco would achieve its target of doubling its turnover to $ 20 billion three years in advance
Future Outlook
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http://www.iitk.ac.in/infocell/announce/convention/papers/Colloquium-04Aman%20Srivastava,Rakesh%20Gupta%20final.pdf
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The markets questioned Hindalcos assumption that more aluminium would be consumed by automobile, transport, electronics
He has been proved right three years hence. Novelis expects transport and electronics sectors to be global demand drivers and clock 20-25 per cent growth in 2011, as developed markets revive.
http://www.hindalco.com/investors/downloads/Hindalco_Annual_Report_Notice2011%20.pdf
Strengths Hindalco became the world leader in flat-rolled aluminium products and recycling of aluminium cans. leading producer in primary aluminium and alumina in Asia.
SWOT Analysis
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Weaknesses
Threats Prices of primary metals are highly volatile. Disruption in production due to external factors.
http://hindalcoindustrieslimited.blogspot.com/2010/12/swot-analysis-of-hindalco.html
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FINACIAL FIT
http://www.iitk.ac.in/infocell/announce/convention/papers/Colloquium-04Aman%20Srivastava,Rakesh%20Gupta%20final.pdf
After spinoff (Alcan and Pechiney) Novelis inherited a debt mountain of almost $2.9 billion on a capital base of less than $500 million.
Acquisition time on a net worth of $322 million, Novelis had a debt of $2.33 billion (most of it high cost). Debt/Equity =7.23:1
Novelis for the first nine months of 2006, had a loss of $170 million (Rs 765 crore) on revenues of $7.4 billion (Rs 33,300 crore).
Hindalco had over $800 million (Rs 3,520 crore) in cash and equivalents Debt to Equity Ratio almost Zero 55% increase in net profit from 2006 to 2007
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If 66.66% of the shareholders okay the deal, remaining shareholders would be compelled to sell their share to Hindalco under the Canadian law.
If the 66.66% approval was not obtained, Birla had the right to walk away from the deal
Hindalco made the Novelis board sign a $100- million break fee, the price Novelis had to pay if it finds another buyer.
over the 44.93$ per price- only at that price could Novelis entertain a
fresh rival bid..
Deal structure
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The deal was an all cash transaction of US $6 billion, which included debt of
US $ 2.4bn.
Hindalco personally contributed US $450 million Aditya Birla group company Essel Mining contributed US $300 million
Hindalco planned to replace existing $2.4bn loan by term loan of US $1bn and high yield bonds of US $1.4bn
Banks involved
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2008: $1-billion loan was taken on Hindalcos books, and the banks that participated in the exercise included ABN Amro, Barclays Capital, Bank of Tokyo-Mitsubishi UFJ, Calyon, Citigroup, Deutsche Bank, HSBC, Mizuho Financial and Sumitomo Mitsui Financial.
2009:Hindalco took a syndicated loan of $982 million (Rs 4,910 crore at current rate) from 11 foreign banks to repay the bridge loan taken two years ago for the Novelis
acquisition.
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As per analysts Birla were paying too high since Novelis indicated loss of $240-285 million in 2006. Novelis indicated pretax profit of $30-100 million in 2007.
Price paid translates to market capitalization /PBT multiple of 36 on Noveliss 2007 forecast
Hindalco paid 11.4x EBITDA, 20.7x EBIT or 53.4x PE. At a total enterprise value of US $ 6 billion. Novelis was nearly 50% larger than Hindalcos current market capitalization. At Novelis long term annual free cash flow target of US $400m (using a real WACC of 9%), it was estimated that acquisition would destroy value by INR60/share.
Hindalco would need to improve annual free cash flow by 35% to US $540m for the acquisition to be value (NPV) neutral.
Financial Challenges
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Company was moving from high margin metal business to low margin.
Acquisition was going to increase revenue but was going to increase
Risk Factors
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The deal would create value only after completion of Hindalcos expansion plans, and due to its highly leveraged position, its plans may
get affected
Adverse changes in currency exchange rates or aluminium prices could negatively affect the financial results and competitiveness of companys aluminium rolled products relative to other materials
The end-use markets for certain products of Novelis products were highly competitive and customers are willing to accept substitutes for the company products
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CULTURAL FIT
Financial Integration
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Standardization : Prior to June 2007 , Hindalcos financial year ended on March, 31st, whereas Novelis period ended on December, 31st
Guidelines of SEBI & SEC were met. Plan to optimize tax bills of both countries. Sharing best practices.
Organisational Integration
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In the first six months after the take over Hindalco deputed just two of its own executives to Novelis: it sent an expert from its copper division
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Plain and simple techniques to manage business. It set up a company to manage IT functions of Novelis due to availability of inexpensive engineers.
Hindalco had set Novelis a target of seven to 12 stock turns per year by 2010,which could free around $300 million in working capital
Market Integration
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Indias demand for aluminium products was projected to double from 1 million tones in 2007 to almost 1.9 million tones in 2012.
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SIMILAR DEALS
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Tata-Corus
On 20 October 2006 the board of directors of Anglo-Dutch steelmaker Corus accepted a $7.6 billion takeover bid from Tata Steel, the Indian steel company.
Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at USD 12.04 Billion.
The deal is the largest Indian takeover of a foreign company and made Tata Steel the world's fifth-largest steel group. Formed by the merger of RUSAL, SUAL, and the alumina assets of Glencore, completed in March 2007. The combined company became the worlds biggest aluminum maker, worth $25-30 billon
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SEBI NORMS
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
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
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