India: Another Overseas Trophy Deal

India's Hindalco Industries' $6 billion takeover of Atlanta-based Novelis will create a metals giant. But investors are wary about the price

Not even two months into 2007, this is already shaping up to be a breakout year for Indian cross-border acquisitions. At the end of January, Tata Steel bagged Anglo-Dutch steelmaker Corus Group (CGA) in a $12 billion deal, the biggest ever foreign transaction by an Indian firm.

On Feb. 12 came another high-profile multibillion-dollar deal: this time it's by Mumbai-based aluminum and copper company Hindalco Industries (HNDNF), which will spend about $6 billion to absorb Atlanta-based Novelis (NVL), an aluminum-sheet maker with a global footprint and about three times more in revenues.

The deal by Hindalco, the flagship company of the Indian conglomerate Aditya Birla Group—with $2.6 billion in annual sales—will create the world's largest aluminum rolling company, India's leading copper producer, and one of the biggest producers of primary aluminum in Asia. It is also the biggest acquisition of a U.S. company by an Indian one.

Stock Nosedive

"The combination of Hindalco and Novelis will establish a global integrated aluminum producer with low-cost alumina and aluminum-production facilities combined with high-end aluminum rolled product capabilities," Aditya Birla Chairman Kumar Mangalam Birla said in a statement.

However, investors had an instantly harsh reaction to the Novelis deal, worrying whether Hindalco paid too dear a price. Similar concerns also hover over the Tata and Corus combination (see, 1/31/07, "Tata Steel Bags Corus—But at What Price?").

Hindalco shares plummeted roughly 12% on the news in late afternoon trading on the Bombay Stock Exchange, to 152 rupees ($3.46) per share. The company "paid big money for big size," says A K Sridhar, executive director of UTI Mutual Fund. He thinks the move is probably a good long-term move, but notes that investors will face an earnings hit in the first year of the combined company as Hindalco absorbs Novelis and takes on debt to finance the deal.

"Shows India Inc.'s Confidence"

With some $8.4 billion in revenues in 2005, Novelis is actually a far bigger player than Hindalco. It has a 19% global share of the flat-rolled aluminum products markets, ranking No. 1 in Europe, South America, and Asia, and it's No. 2 in North America.

The company—headquartered in Atlanta, but registered as a Canadian corporation—specializes in high-quality aluminum sheet and foil products used by automakers such as Ford (F) and General Motors (GM), beverage players including Anheuser-Busch (BUD) and Coca-Cola (KO), and packaging, construction, and printing companies. It's also the market leader in the aluminum beverage can recycling market.

Under the terms of the deal, Hindalco will pay $3.4 billion in cash and raise $2.8 billion in debt to acquire Novelis. Hindalco will also assume about $2.4 billion in debt on Novelis's books. Even so, this latest deal further confirms that Indian companies benefiting from a booming domestic stock market and a rapidly growing economy are ready to step up and do some serious deal-making on the global stage. "It shows India Inc.'s confidence to fuel large acquisitions," says Ved Prakash Chaturvedi, managing director of Tata Asset Management.

Confidence seems to be in abundance. Last year, Indian companies spent $23.1 billion (more than five times the level in 2005) in cross-border acquisitions involving about 166 foreign targets, according to Dealogic. This year—and before February is even finished—Indian companies have acquired more than $8 billion worth of foreign assets, if you include Hindalco's $6 billion takeover of Novelis. (The $12 billion Tata-Corus deal was part of the 2006 tally, according to Dealogic's calculations.) Indian companies are most definitely on the prowl.

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