hindalco novelis finallll
TRANSCRIPT
HINDALCO-NOVELIS DEAL
HINDALCO-NOVELIS DEAL
Industry Overview:
The Indian aluminium sector is characterized by large integrated players
like Hindalco and Nalco.
The other players include Indal which is now a part of Hindalco. There
are also players like Balco and Malco.
The per capita consumption of aluminium in India is only 0.5 kg as
against 25 kg in USA, 19 kg in Japan and 10 kg in Europe.
Even the world’s per capita consumption is 10 times that of India.
The demand of aluminium is expected to grow at 9% p.a. from current
consumption level.
Features of Indian Aluminium Industry:
Highly concentrated industry with only 5 primary plants in the country.
Controlled by only a few players.
Electricity, coal and furnace-oil are primary energy inputs.
All plants have their own captive power units for cheaper and un-
interrupted power supply.
Energy is 40% of manufacturing cost for metals and 30% for rolled
products.
Energy management is a critical focus in all the plants.
Each plant has an Energy Management Cell.
High cost of technology is the main barrier in achieving high energy
efficiency.
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About Hindalco Industries:
Hindalco Industries a flagship company of Aditya Birla Group is
structured into two strategic business alliances- copper and aluminium.
It has an annual revenue of US $ 14 bn and market capitalization in
excess of US $ 23bn.
It commenced its operations in 1962 and today it has grown to
become the country’s largest integrated aluminium producer.
It also ranks among the top quartile of low cost producers in the world.
The aluminium division’s product range includes alumina chemicals,
primary aluminium ingots, billets, rolled products, extrusions, wire rods,
foils and alloy wheels.
Shareholding Pattern:
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Operations In India:
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Global Presence:
Hindalco: Impressive Growth:
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Hindalco Growth Path:
Consolidated Hindalco:
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Hindalco Business:
Domestic Market Share:
Division Market Share [ % ]
Primary aluminium 42
Rolled products 63
Extrusions 20
Foils 44
Wheels 31
Sales Revenue Of Aluminium Business:
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Production Capacities:
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Expansion Plans:
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Stock Highlights:
Stock Reactions:
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Company Growth v/s Industry Growth:
Peer Comparison:
FY 08- A Challenging Year:
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Consolidated Financial Highlights:
Future Outlook:
About Novelis:
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It is the world leader in aluminium rolling.
It produces an estimated 19% of the world’s flat rolled aluminium
products.
It is the world leader in the recycling of used aluminium beverage
cans.
It is the no. 1 rolled products producer in Europe, South- America
and Asia and the no.2 producer in North- America.
Some of its customers include- Coca- Cola, Ford and General Motors.
The company had 36 operating facilities in 11 countries as of
December 31, 2005.
Global Presence:
Product Portfolio:
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Novelis Supplies World Leaders:
Leader In Auto Sheet Maker:
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Leader In Can Sheet Market:
Attractive Industry Fundamentals:
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Significant barriers to entry exist in the aluminium rolled products
industry:
1. Large capital cost.
2. Long lead times to install cost competitive plants.
3. Technological requirements, premium on “ know-how.”
4. Customer qualifications demand.
Rising service, quality and efficiency demands of large global
customers.
Continued growth in aluminium consumption particularly China
and India.
Price structure insulates producer from the variability of primary
aluminium prices.
Novelis Regional Overview:
Balanced Portfolio And Market Position:
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World Of Novelis:
Market Share Of Aluminium Rolled Products:
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Diversified Presence:
Growth Platforms For Novelis Fusion:
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Investments For Strategic Growth:
Growth Model:
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Past Performance Novelis:[ Million $ ]
Rationale For Acquisition:
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The combination of Hindalco and Novelis establishes an integrated
producer with low cost alumina and aluminium facilities combined with
high-end rolling capabilities and a global foot-print.
Hindalco will be able to ship primary aluminium form India and
make value added products.
The acquisition will increase Hindalco’s scale of operation , entry into
a high-end downstream market and enhancing global presence.
Novelis is a global leader [in terms of volume] in rolled products with an
annual capacity of 2.8 million tonnes and a global market share of 19%.
Novelis has a capacity to produce 3 million tonne while Hindalco has
a capacity of 2,20,000 tonne.
Hindalco plan to triple aluminium output to 1.5 million metric tonne by
2012 to become the world’s 5th largest producer.
By acquiring Novelis, Hindalco fulfilled it’s dream to become the
world’s largest producer of aluminium flat rolled products.
This acquisition gives access for Hindalco to high-end products and
also superior technology.
This deal will give Hindalco a strong presence in recycling of
aluminium business.
It would have taken a minimum of 8-10 years for Hindalco for
building these facilities.
Hindalco also get the fusion technology of Novelis which increases the
formability of aluminium.
According to reports it would take 10 years and US $12bn to build
the 29 plants that Novelis has with capacity close to 3 million tonnes.
The purchase strategically shifts Hindalco from an upstream aluminium
producer to a downstream producer
Facts About The Bid:
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Unlike the Tata-CSN shootout, the bidding was low profile.
The identity of other bidders and the price they offered are not known,
though Birla said that the bidding was very competitive.
Hindalco made only one bid- 44.93$.That won the deal.
Rules Of The Deal:
If 66.66% of the shareholders okay the deal, remaining shareholders will
be compelled to sell their share to Hindalco under the Canadian law.
If the 66.66% approval is not obtained, Birla has the right to walk away
from the deal.
Hindalco made the Novelis board sign a $100- million breakfee, the price
Novelis has to pay if it finds another buyer.
There was also a clause of ‘new buyer premium ’of a ‘few dollars a
share’ over the 44.93$ per price- only at that price can Novelis entertain a
fresh rival bid.
So if a new bidder enters, it has to cough up atleast $5 a share more than
what Hindalco did.
Facts Of The Deal:
The deal was an all cash transaction of US $6 bn, which included
debt of US $ 2.4bn.
Hindalco will pay $ 44.93 in cash for each outstanding common share
of Novelis, around 15% premium to the market price.
The agreement requires 66.66 per cent of Novelis shareholders present
and voting to tender their shares. Otherwise, Hindalco will walk away. If
this condition is satisfied, the remaining one-third of shareholders will be
"squeezed out," (will have to sell to Hindalco).
Post-acquisition, over 50 per cent of the group's business could come
from operations outside India, which is currently at 30 per cent.
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Also, 20 per cent of the group's total workforce would also be based
outside India.
After the merger Hindalco will emerge as the largest rolled
aluminium products maker and 5th largest integrated aluminium
manufacturer in the world.
Novelis brings in high technology support.
Novelis has a global market share of 19% while Hindalco enjoys a share
of 60% in the rolled products market.
The Novelis acquisition will give Hindalco a strong global foot-print .
Novelis is operating in 11 countries with around 12,500 employees.In
2005, the company reported net sales worth US $8.4bn and net profit of
US $90 mn.
Novelis reported net sales of US $7.4 bn and net loss of US $170 million
in nine months during 2006, on account of low contract prices.
Novelis has a rolled product capacity of 3 million tonne while Hindalco
at this moment does not have any surplus capacity.
Hindalco’s Greenfield expansion will give it a primary aluminium
capacity of approximately 1 million tonne, but it will take around 3-4
years for all these to come into operation.
Considering these factors, Hindalco’s profitability is expected to remain
under pressure and this will bounce back in 2009-10
The debt burden of Novelis stood at US $2.4bn and additional US
$2.8bn will be taken by Hindalco to finance the deal.
This will put tremendous pressure on profitability due to high interest
burden.
Hindalco’s current expansion plans will cost Rs 25,000 crores and as
a result debt burden and interest will increase further.
Funding Structure:
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Funding Pattern:
The Novelis acquisition of US $6bn is been funded through US $3.1bn of
loan.
Hindalco personally will contribute USD 450 million.
Aditya Birla group company Essel Mining will contribute USD 300
million.
Hindalco plans to raise USD 2.8 bn of debt through 2 special purpose
vehicles.
US $455mn through liquidation of investments.
Existing loan of US $2.4bn will be replaced by term loan of US $1bn and
high yield bonds of US $1.4bn.
Financial Challenges:
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The acquisition will expose Hindalco to a weaker balance sheet.
The company will move from high margin metal business to low margin
downstream products business.
The acquisition will more than triple Hindalco’s revenues, but will
increase the debt burden and erode profitability.
Risk Factors:
The deal will create value only after completion of Hindalco’s expansion
plans, and due to its highly leveraged position, its plans may get affected.
Novelis profitability could be adversely affected by the inability to pass
through metal price increases due to metal price ceilings in certain of the
company’s sales contracts.
Some of the customers are significant to the company’s revenues and any
change in their business or financial conditions could adversely affect the
company’s business.
Adverse changes in currency exchange rates could negatively affect the
financial results and competitiveness of company’s aluminium rolled
products relative to other materials.
Unexpected fall in aluminium prices could adversely impact earnings.
The end-use markets for certain products of Novelis products are highly
competitive and customers are willing to accept substitutes for the
company products.
FUTURE:
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Future Of Aluminium:
Investment Required:
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Financials:
1. Consolidated:
2. Standalone Performance: [ Hindalco ]
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3. Consolidated Balance Sheet:
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4. Segmental Performance:
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5. Aluminium- Sales Volume/ Realization:
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6. Operational Performance:
7. Production Growth:
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8. Key Ratios- Aluminium:
SWOT Analysis:
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Strengths:
1) Post acquisition of Novelis, Hindalco has become the world leader in
flat-rolled aluminium products and recycling of aluminium cans.
2) It is also the leading producer in primary aluminium and alumina in
Asia.
3) It has a strong geographical presence- North and South America, Asia
and Europe.
Weakness:
1) The R&D expenditure is very low compared to industry standards.
Opportunities:
1) Strong growth in demand for aluminium.
Threat:
1) Prices of primary metals are highly volatile.
2) Disruption in production due to external factors.
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