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Merger & Acquisition (Hindalco & Novelis)

Presented by: Anand Mishra Jeewan Das Mohta Sansad Panigrahi Siddhartha Anand Sumit Kamra

Hindalco Novelis

ON TARGET

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

-Kumar Mangalam Birla, Chairman, Hindalco Industries

http://www.slideshare.net/gagan3211/merger-acquisition-hindalco-novelis

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INTRODUCTION

Indian Aluminum Industry

ON TARGET

Highly concentrated industry with only five primary plants in the


country.

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.

Energy conservation and reduced consumption is main motive.

Increased competition from imports of aluminum.

Hindalco

ON TARGET

A flagship company of Aditya Birla Group - structured into two strategic businesses Aluminum and Copper.

Commenced its operations in 1962 and today it has grown to become


the countrys largest integrated aluminum producer.

Annual revenue of US $14 billion. market capitalization in excess of US

$ 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

bottom line growth from 15.8B to 26.9B

Novelis

ON TARGET

A spin-off from Alcan - rich 90-year history in the aluminium rolled

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.

World leader in aluminium rolling - producing an estimated 19 percent

of the world's flat-rolled aluminium products.

World leader in the recycling of used aluminium beverage cans.

Novelis

ON TARGET

46 Operations in 13 countries

ON TARGET

STRATEGIC FIT

Hindalco Strategy

ON TARGET

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

Strategic Perspective : Novelis


ON TARGET

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

Rationale for Acquisition

ON TARGET

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

ON TARGET

http://www.iitk.ac.in/infocell/announce/convention/papers/Colloquium-04Aman%20Srivastava,Rakesh%20Gupta%20final.pdf

ON TARGET

POST DEAL ANALYSIS

Post Deal analysis

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The markets questioned Hindalcos assumption that more aluminium would be consumed by automobile, transport, electronics

and cola companies.


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.

Rolled product shipments are up eight per cent year-on-year (y-o-y) in


North America due to growth in can, automotive and industrial products.

Europe has seen y-o-y volume growth of 10 per cent.

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

The R&D expenditure is very low compared to industry standards

Opportunities Strong growth in demand for aluminium

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

Post Deal analysis


http://www.moneycontrol.com/india/stockpricequote/aluminium/hindalcoindustries/HI

ON TARGET

ON TARGET

FINACIAL FIT

http://www.iitk.ac.in/infocell/announce/convention/papers/Colloquium-04Aman%20Srivastava,Rakesh%20Gupta%20final.pdf

Novelis Financials: Pre acquisition


ON TARGET

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 Financial pre acquisition


ON TARGET

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

Net profit of 25,643 crore as per 2007 balance sheet.

Rules of the deal

ON TARGET

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.

There was also a clause of new buyer premium of a $5dollars a share

over the 44.93$ per price- only at that price could Novelis entertain a
fresh rival bid..

Deal structure

ON TARGET

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

US $455mn through liquidation of investments


Hindalco paid $44.93 in cash for each outstanding common share of Novelis, around 15% premium to the market price

Hindalco planned to replace existing $2.4bn loan by term loan of US $1bn and high yield bonds of US $1.4bn

Hindalco raised US $ 2.8 billion of debt through 2 special purpose vehicles

Banks involved

ON TARGET

2007 :Hindalco-Novelis deal, UBS (along with ABN AMRO &


Bank of America) threw the Birla company a $2.8 billion debt lifeline.

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.

Valuation for acquisition

ON TARGET

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

ON TARGET

Acquisition was going to expose Hindalco to a weaker balance sheet

Company was moving from high margin metal business to low margin.
Acquisition was going to increase revenue but was going to increase

debt burden and erode profitability

Risk Factors

ON TARGET

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

ON TARGET

CULTURAL FIT

Financial Integration
ON TARGET

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
ON TARGET

Existing management structure ,system ,people (Job Roles ) left undisturbed.

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

to institutionalize a risk-management process and installed a senior


executive in Novelis logistics department to help improve its global supply chain

No Layoffs ,however hiring activities were kept on hold for sometime.

Business Process Integration

ON TARGET

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

ON TARGET

Indias demand for aluminium products was projected to double from 1 million tones in 2007 to almost 1.9 million tones in 2012.

Half of the increase would be for the kind of flat-rolled products

Novelis produces. Thus, India could absorb a third of the North


American companys output in three years time

ON TARGET

SIMILAR DEALS

Similar deals in industry

ON TARGET

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

The United Company

ON TARGET

SEBI NORMS

SEBI Guidelines (Takeover code)


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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

ON TARGET

THANK YOU

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