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Mergers and acquisitions: a part of the inorganic growth strategy

Series of acquisitions post 1991 in metal industry initiated by


Mittal- Arcelor followed by Tata-Corus .

Process extended by Indian aluminium giant Hindalco acquiring


Atlanta based company Novelis Inc.

Acquisition happened in May 2007 for US$ 6 billion


“We look upon the aluminium 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

“The combination of Novelis's world-class rolling assets with Hindalco's


growing primary aluminum operations and its downstream fabricating assets
in the rapidly growing Asian market is an exciting prospect.”

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


Novelis: a world leader in
manufacturing flat rolled
aluminium products and sheet
Hindalco: manufacturer of mills
alumina & primary aluminium
Increased use of automobiles expected to demand growth of
aluminium over 5%

Asia: highest consumption area led by China

Power, infrastructure, transportation account for almost 3/4th of


domestic aluminium consumption

Government focus towards higher GDP growth rate: positive impact on


aluminium consumption

Lowering of duties (5% customs and additional surcharge 3% of


customs duty) reduces net tariff protection for domestic aluminium
producers

Reduction in import duties: aluminium majors Hindalco & Nalco under


pressure
Highly concentrated industry with only five primary plants in the country:
Hindalco, Nalco, Indal (now merged with Hindalco), Balco & Malco

Controlled by two private groups and one public sector unit

Per capita consumption of aluminium in India is only 0.5 kg as against 25


kg in USA, 19kg in Japan and 10 kg in Europe

Energy management is a critical focus in all the plants: 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
Company Capacity Production Capacity
(lac tonne) (lac tonne) utilization (%)
BALCO 1.00 0.96 90
HINDALCO 2.42 2.49 103
INDAL 1.17 0.44 37.18
MALCO 0.25 0.02 0.06
NALCO 2.18 2.13 97.56
Total 7.02 6.03 85.92
Figures pertaining to the year 1999-2000
Company name Sales Rank PAT Rank Market Cap Rank

Hindalco Industries Limited 110807.8 1 16555.5 1 197576.78 1

National Aluminium Company


Limited 48460.7 2 15622 2 167520.5 2

Madras Aluminium Company


Limited 4513.23 3 831.35 3 9585 3

Associated Profile Aluminium


Limited 1662.98 4 43.58 5 2130.09 4

PG Foils Limited 1018.31 5 17.3 6 0 5

Figures in Mn
• Established in 1958 , it’s a flagship company of Aditya Birla Group.

• Has an annual Revenue of $14 Billion & market capitalization in excess of US $ 23


billion.

• It has two strategic businesses : aluminium and copper.

• The country's largest integrated aluminium producer and ranks among the low cost
producers in the world.

• The product range includes alumina chemicals, primary aluminium ingots, wire rods,
rolled products, extrusions, foils and
alloy wheels.
Canadian Company formed in early 2005 as a result of a ‘forced’ spin-off from its parent
Company Alcan.

World leader in aluminium rolling, producing an estimated 19 percent of the world's flat-
rolled aluminium products.

Also it is the world leader in the recycling of used aluminium beverage cans.

The company produces aluminium sheet and foil products for customers in high -value
markets including automotive, transportation, packaging, construction and printing.

Key customers : Coca-Cola, Crown Cork & Seal, Ford, General Motors, Alcan, Kodak, Tetra
Pak,
Number one rolled product supplier in the world
– #1 in Europe
– #2 in North America
– #1 in Asia-Pacific
– #1 in South America

• Leading market positions in chosen regional and global segments


– #1 in can, auto, litho and foil

• Leading recycling position


• Leader in rolling technology
• Leader in continuous casting technology
• Industry position enables Novelis to
participate in industry consolidation
• The deal was in an all-cash transaction, which values Novelis at
enterprise value of approx US $6.0 billion, including approx US $2.4
billion of debt.
• Hindalco - Novelis - Worlds Largest Aluminium Rolling Aluminium
Recycling, Aluminium Foil Packaging Company and fifth -largest
integrated aluminium manufacturer in the world.
• The Novelis acquisition will give the company immediate scale and
strong a global footprint.
• The company reported net sales of US $7.4 billion and net loss of US
$170 million in nine months during 2006, on account of low contract
prices.
• By January 1, 2010, all the sales contracts will get expired and
profitability will increase substantially from then onwards.
• Novelis will work as a forward integration for Hindalco as the
company is expected to ship primary aluminium to Novelis for
downstream value addition.
• Novelis has a rolled product capacity of approximately 3 million
tonne while Hindalco at the moment is not having any surplus
capacity of primary aluminium.
• Hindalco’s greenfield expansion will give it primary aluminium
capacity of approximately 1 million tonne in 3-4 years.
• Hindalco’s profitability is expected to remain under pressure and
this will bounce back in 2009-10. The rofitability will be accretive only
in 2010-11.
In May 2007, Hindalco acquired Novelis for US$6 billion

The rationale:
• Increasing scale of operation, entry into high—end downstream
market:: Novelis, the global leader in rolled products has an
annual production capacity of 2.8 million tonnes and a market
share of 19 per cent - presence in 11 countries and provides
sheets and foils for varied purposes
• Enhancing global presence: access to customers such as
General Motors Corp. & Coca-Cola Co
• After full integration, the joint entity will become insulated from
the fluctuation of LME Aluminium prices
• Superior technological expertise: ‘Novelis Fusion’ technology
enables it to produce 3 million tonne of flat rolled products
compared to Hindalco’s 220,000 tonnes a year- Hindalco plans to
triple aluminium output to 1.5 million metric tonne by 2012
• Increasing rolling capabilities through mill upgrades and innovative
practices
• Leverage on first mover advantage in high value added product
segments in India
• Thrust on recycling capacities – recycling needs just 5% of that of
producing primary aluminium
• Deal worth for Hindalco: the replacement value of the Novelis is
US $12 billion (as per company details)
•On May 15, 2007, the Company acquired Novelis Inc., Canada through
its indirect wholly-owned subsidiary AV Metals Inc. pursuant to a plan of
arrangement entered into on February 10, 2007 and approved by the
Ontario Superior Court of Justice on May 14, 2007

•On October 5, 2007 the Company acquired shareholding of Alcan Inc.


consisting of 78,564,384 equity shares of Rs 10/- each in Utkal Alumina
International Limited (Utkal)

•Pursuant to a scheme of amalgamation, Indian Aluminium Company


Limited (INDAL), an existing subsidiary was amalgamated with the
Company effective April 1, 2007

•Two new subsidiaries Tubed Coal Company Limited (with Tata Power
as the other JV partner) and East Coast Bauxite Mining Company
Private Limited (with Orissa Mining Corporation as the other JV partner)
have been formed.
Valuation – a cause of concern for Novelis acquisition
In 2005, Novelis’ net profit was S$ 90 million; share prices
never crossed US$ 30
Novelis management indicated a loss of US$ 240-285 million
in 2006
Immediate effect: Hindalco would achieve turnover of US$ 20
billion
Perfect fit for long term goal – a step ahead towards
Hindalco’s goal of becoming a leading producer of aluminium
and copper
Novelis is nearly 50% larger than Hindalco’s current market
capitalization: concern for severity and value dilution
Hindalco’s exposure to a weaker balance sheet
Company will move from high margin metal business to low-
margin downstream products business
Greater debt and erosion of profitability, although Hindalco’s
revenues shall be tripled
Decreased profits for Novelis - metal price increase due to
metal price ceilings in certain company’s sales contracts
Change in currency rates can negatively impact the financial
results and competitiveness of aluminium compared to other
metals
Company’s agreement of not to compete with Alcan in
certain end-use markets may hinder Novelis ability to take
advantage of new business opportunities
Integration: Integration of companies with diverse cultures,
nationalities across various levels and functions
Retaining cutting edge: Spirit and capability of innovation,
key customer relationships, people skills to be expanded
across greater Hindalco
Identifying and realising synergies: IT and risk
management skills, jointly realising downstream vision, and
international marketing
Improving Novelis’ financial performance: focus on costs,
operations, pricing and working capital
End-use markets for certain of Novelis’ products are highly
competitive - customers can accept substitutes for the same
Many customers of Novelis significant to the company’s
revenues - adversely affected by changes in the business
An aggressive growth plan by Hindalco, a combination of organic & inorganic growth
Upstream growth through organic route; a prudent mix of Brownfield & Greenfield
expansions
Downstream growth through acquisition (Novelis)

Maintain growth Build new Realise Novelis


PRIORITIES
momentum assets synergies

Progress on Planned
Continued stress on Financial turnaround &
Greenfield projects and
Operational excellence Leverage on technology
deliver on time

Well positioned for greater value creation..


High prices and buoyant demand outlook in the domestic as well
as international markets: expansion plans by aluminium majors
At January 2007 end, aluminium products sector amounted to
Rs.59,81800 million and are spread across 35 projects
Aluminium smelting capacity will increase from 11.8 lac tonnes to
18 lac tonnes by 2010
Hindalco increased its capacity at Hirakud plant by 35,000
tonnes to one lac tonne
Domestic alumina capacity is set to increase by 9.5 million
tonnes on completion of outstanding projects
Surplus production set to be exported to lucrative markets
increased usage in automobiles is expected to keep
the demand growth for aluminium over 5% in the long-term.

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