Metals Merger: India's Birla Thinks Big
This year is shaping up to be the year of the deal in India. The latest: On Feb. 11, Mumbai-based aluminum and copper company Hindalco Industries (HNDNF) announced plans to spend $6 billion to absorb U.S.-Canadian Novelis (NVL) and create the world's largest aluminum-rolling company. Hindalco is the flagship company of the Indian conglomerate Aditya Birla. Group Chairman Kumar Mangalam Birla explained in an interview with Businessweek.com reporter Nandini Lakshman his thinking behind the acquisition.
Why the Novelis deal?
The acquisition is a landmark transaction for Hindalco and our group. It is in line with our long-term strategy of expanding our global presence across our various businesses. The combination will establish a global, integrated, aluminum producer with low-cost alumina and aluminum-production facilities combined with high-end aluminum rolled-product capabilities. The complementary expertise of both these companies will create and provide a strong platform for sustainable growth and ongoing success.
It also makes Hindalco a global leader in aluminum and expands our involvement in the downstream markets. Novelis is the global leader in aluminum rolled products and aluminum-can recycling, with a global market share of about 19%. Hindalco has a 60% share in the currently small but potentially high-growth Indian market for rolled products. Hindalco's position as one of the lowest-cost producers of primary aluminum in the world can be leveraged to make us into a globally strong player. The Novelis acquisition will give us immediate scale and a global footprint.
But isn't the primary metal vulnerable to price movements?
At present, 50% of Hindalco's produce is sold as primary metal, which is exposed to the vagaries of the price movement on the London Metal Exchange. Novelis, with its value-added downstream products, is by and large free from such vulnerabilities, as are Hindalco's 50% value-added products. We were attracted to Novelis by its sheer size, scale, and cutting-edge technology, which would have taken us a decade to build.
Today every Indian company is talking about scale. Why?
The scale of operation is extremely important for the aluminum sector as it is very capital intensive. Hindalco accounts for 36% of our group turnover. Five years ago metals contributed 30% to the group's top line. This configuration could change as Hindalco has ambitious growth plans. Our greenfield and brownfield projects in Madhya Pradesh, Orissa, and Jharkand in India will go on stream in the next four years, which will impact Hindalco's revenues and earnings dramatically.
Today how important are global acquisitions to climbing the value chain?
Global acquisitions are integral. In aluminum one needs to invest in downstream to go up the value chain. India does not offer suitable downstream investment opportunities of a global scale. Globally, Novelis is the best asset as far as flat-rolled aluminum products are concerned. India's share is less than 3% of the total 16-million-ton aluminum flat-rolled products output. Hence the opportunities to invest in aluminum and other industries are more attractive overseas.
Analysts say you overpaid for Novelis.
It's a matter of perception. We have conducted an extensive due diligence to arrive at our valuation. The implied multiples we have come up with are in line with comparable transactions, keeping in mind the fact that Novelis is the global leader in its area of operations. Do bear in mind that the reported EBITDA [Earnings Before Interest, Taxes, Depreciation, and Amortization] multiple needs to be adjusted for exceptional items like can-price ceiling, hedging, joint-venture contribution, etc., to arrive at the sustainable EBITDA. Also, we went through a competitive bidding process.
Why did investors sell off Hindalco shares?
The markets probably take a short-term view of this acquisition. But we see long-term value in it.