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Hindalco vs. Novelis: A Case on Acquisition

Article · January 2012
DOI: 10.1057/9780230363533_7

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 ecch: 310-284-1 Dr Sadananda Prusty London Business School REF: CS-10-007
Date: 2008

Hindalco vs. Novelis: A Case on Acquisition

Indian aluminium giant Hindalco acquired Atlanta based company Novelis, a world leader
in aluminium rolling and flat-rolled aluminium products, on May 15, 2007. This acquisition
was done to gain immediate scale and a global footprint. Acquiring Novelis would also give
Hindalco access to sheet mills that supplied to can manufacturers and auto companies. By
investing in downstream Hindalco would go up the value chain and become a world leader
in downstream aluminium rolled products. It was already the biggest producer of primary
aluminium in Asia and leader in copper production in India. However many analysts
believed that Hindalco had overpaid for a company that was making losses and that
aluminium prices would drop by 2011. Would this acquisition prove beneficial for the
shareholders?

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 with a passion for excellence. The acquisition of Novelis Inc. (NYSE, TSX:
NVL) is a step in this direction. The combination of Hindalco Industries Limited (BSE:
HINDALCO) and Novelis establishes an integrated producer with low-cost alumina and
aluminium facilities combined with high-end rolling capabilities and a global footprint. The
complementary assets and expertise of the team provides a strong platform for growth and
success.

Kumar Mangalam Birla, Chairman of Hindalco1

1 th
Mentioned during Press Release on 15 May 2007 at Atlanta when Novelis Inc. announced the
completion of its acquisition by Hindalco Industries Limited (Source: Novelis Inc.).

This case was prepared by Dr Sadananda Prusty, Institute of Management Technology, Ghaziabad, India as a basis for
classroom discussion rather than to illustrate either effective or ineffective handling of a management situation. The case
study was supported by the Aditya Birla India Centre at London Business School.

Copyright © 2008 London Business School. All rights reserved. No part of this case study may be reproduced, stored in a
retrieval system, or transmitted in any form or by any means electronic, photocopying, recording or otherwise without written
permission of London Business school.
 London Business School ecch:

We are very pleased to complete this transaction with Hindalco. The arrangement has
created significant value for Novelis shareholders while at the same time providing new
opportunities for the future of the combined company. With the support of Hindalco and the
Aditya Birla Group, we will be able to accelerate the Novelis business strategy, leveraging
our world-class assets for the production of premium aluminium products.

Martha Brooks, President & Chief Operating Officer of Novelis1

Background

Hindalco Industries Limited3 started in 1958 and commissioned its first aluminium facility at
Renukoot in Uttar Pradesh in 1962. Based in Mumbai, India, Hindalco (a part of A V Birla
group) recorded revenues of approximately US $4.3 billion for the fiscal year ended March
31, 2007. Its products ranged from primary aluminium to downstream roll products and
diversified products like alloy-wheels and foils. The company launched „The Aluminium
Store‟ all across India for retail customers and launched new products like Aura for wheel
solutions, Freshwrap for kitchen foils, and Everlast for roofing solution. Being a domestic
leader, its primary aluminium was traded in London Metal Exchange (LME) and exported
to nearly 30 countries covering North America, Western Europe and Asian region.
Hindalco‟s integrated operations and operating efficiency positioned the company among
the most cost-efficient aluminium producers globally. Its profit after tax (PAT) had been
continuously increasing (Refer to Exhibit 4) and actual production exceeded installed
capacity in 2006 (Refer to Exhibit 5). Hindalco‟s stock was publicly traded on the Bombay
Stock Exchange (BSE), the National Stock Exchange (NSE) of India Limited and the
Luxembourg Stock Exchange.

Novelis Inc.

Novelis Inc.2, headquartered at Atlanta, Georgia, was formed as a Canadian corporation to

acquire and independently carry on most of the aluminium rolled products business
operated by Alcan. Novelis was then spun off by Alcan on January 6, 2005 and mainly
concentrated on production of aluminium rolled products and aluminium can recycle. The
company had been supplying aluminium sheet and foil to the automotive and
transportation, beverage and food packaging, construction and industrial, and printing
markets. The company‟s customers included major brands such as Agfa-Gevaert,
Anheuser-Busch, Ball, Coca-Cola, Daching Holdings, Ford, General Motors, Lotte
Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull, Tetra Pak and ThyssenKrupp. Novelis
operated in four continents including North America, South America, Asia and Europe,
through 36 operating plants including three research facilities in 11 countries as on
December 31, 2005. The company had been managing its activities on the basis of

1 Ibid. 3 See
http://www.hindalco.com
2 See http://www.novelis.com & Datamonitor Company Profile-Novelis Inc., May 11,
2007.
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geographical areas and its activities were organized under four operating segments:
Novelis North America (NNA), Novelis Europe (NE), Novelis Asia (NA) and Novelis South
America (NSA). Shares of the company‟s common stock were traded on the New York
Stock Exchange (NYSE) and on the Toronto Stock Exchange (TSE) under the symbol
NVL. The company suffered a net loss of US $275 million in 2006 as compared to a net
income of US $90 million in 2005 (Refer to Exhibit 2). This loss was mainly on account of
39 percent increase in aluminium prices (between September 30, 2005 and 2006), which it
was unable to pass on to its customers as per an earlier contract. On February 10, 2007,
Novelis and Hindalco entered into a definitive agreement for Hindalco to acquire Novelis.

Rationale for Acquisition

Hindalco Industries Limited, based in India, was the highest domestic producer of
aluminium (Refer to Exhibit 6) and had highest domestic market share during FY2005 –
FY2006 (Refer to Exhibit 7). Its profit after tax (PAT) had continuously increased from
Rs.686 crore in FY2002 to Rs.2564 crore in FY2007 (Refer to Exhibit 4). With accelerating
domestic growth Hindalco always looked for overseas options through which it could
increase their production capacity and explore some new markets for their products. Thus,
its main objectives were to increase scale of operation, entry into high-end downstream
segment of aluminium, and make a mark on global metal market (i.e., to follow an
inorganic growth strategy).

When looking for opportunities overseas they usually had two options, i.e. either set up a
new plant or extend its business by acquiring a foreign firm. Setting up a new plant option
was not suitable due to the very nature of metal business which would require huge
investment and more time. Thus acquiring a company like Novelis became the preferred
option. The main attractions were the strength of Novelis in its scale of operation and
technological superiority. Novelis had a presence in 11 countries and enjoyed a global
market share of 19 percent in FRP segment, making it a leader. 3 Its client list was quite
impressive ranging across different industries like automobile (Ford, General Motors) to
construction (ThyssenKrupp) to beverages (Coca-Cola, Anheuser-Busch) to printings
(Agfa-Gevaert, Kodak) and others. Analysts believed that Hindalco would capture the total
value chain in the aluminium business after acquiring Novelis. 6 “For Hindalco‟s investors
the advantage is that revenues and share price, is expected to be less vulnerable to
aluminium price fluctuations on the London Metal Exchange (LME). Hindalco share price
currently has a strong correlation with aluminium prices and they directly track the LME
metal price. This is because 83 percent of its EBITDA (earnings before interest, taxes,
depreciation and amortization) is sourced from the aluminium business” said Debnarayan

3 See Joshi, Akash, “Hindalco-Novelis: A Suitable Bonding”, The Financial Express, February 12,
2007. 6
Ibid.

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Bhattacharya.4 “Experts say the Hindalco-Novelis deal makes sound sense. The Indian
company gets access to new technologies and a beverage container market that kicks
around 200 billion cans across the world, not to speak of screw caps and bottle closures of
every conceivable type. Then there is an Indian market that has traditionally been
bottleoriented.”8 “It‟s a growth market any way you look at it and yet another sign that India
is beginning to think international,” said Ajay Kohli, Professor and Isaac Stiles Hopkins
Chair in Marketing at Atlanta‟s Emory University. 5 Novelis had 2,960,000 tonnes of actual
production whereas Hindalco had only 211,088 tonnes in 2006 (Refer to Exhibit 5).
Hindalco was also in the process of a massive expansion and its capacities were expected
to touch 1.5 million tonnes by 2012 to become one of the world‟s five largest producers
from its 13th position in the early 2007.6 This expectation of Hindalco could certainly take
shape only with the acquisition of Novelis. With this acquisition, Hindalco‟s combined
revenues would be in excess of US $10 billion, which would help Hindalco to enter the
Fortune-500 listing by sales revenues. It would get an entry into Global Leaders‟ Club and
also become a leader in 4 continents Asia, Europe, North America and South America
(Novelis was already either on top or among top 5 in all continents). “The Hindalco-Novelis
combine, which would have a current market capitalization of over US $7.5 billion, would
propel Hindalco to become world‟s largest aluminium rolling company, one of the biggest
producer of primary aluminium in Asia and India‟s leading copper producer.”11

“Novelis with its value added products and a global leader, makes a perfect fit for Hindalco.
Your Company‟s position as one of the lowest-cost producers of primary aluminium in the
world can be leveraged to make us into a globally strong player. Enormous geographical
market and product synergies accrue from this combination. I would also like to point out
that primary metal which constitutes almost 50 percent of Hindalco‟s produce is exposed
to the vagaries of the price movement on the London Metal Exchange. Novelis with its
valueadded downstream products is by and large free from such vulnerabilities. I believe
the Novelis acquisition gives your Company an instant leg-up with its technological
sophisticated aluminium product‟s capability apart from a scale and global footprint.
Globally Novelis is the best asset as far as flat-rolled aluminium products are concerned. It
would have taken your Company over a decade to set up such facilities on its own. The
quality of its people, several of whom I have interacted with, is excellent. I do realize that in
the short-term it does cause a strain on your Company‟s Balance Sheet. However, if you
look at the bigger picture, this is one of the most striking acquisitions and over the longterm
will undeniably create enormous shareholder value.”12

The Deal

4
Ibid.
8
See Rajghatta, Chidanand, “Novelis Acquisition puts Indian Stamp on every Coke, Budweiser
Can”, The Times of India, February 14, 2007.
5
Ibid.
6 Ibid. 11 See Press releases of Hindalco on http://www.domain-b.com (Hindalco acquires Novelis
for $6billion, February 12, 2007). 12
See The Chairman‟s (K M Birla) Letter to Shareholders, Hindalco Industries Limited, Annual
Report 2006-07, pp.3-5.
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On May 15, 2007, Novelis was acquired by Hindalco 7 through Acquisition Subsidiary (i.e.,
AV Metals) pursuant to the Arrangement entered into on February 10, 2007 and approved
by the Ontario Superior Court of Justice on May 14, 2007. As a result of the Arrangement,
Acquisition Subsidiary (i.e., AV Metals) acquired all of the Novelis‟s outstanding
75,415,536 common shares at a price of US $44.93 per share, and all outstanding stock
options and other equity incentives were terminated in exchange for cash payments 8. The
aggregate purchase price for the Novelis‟ common shares was US $3.4 billion [(Cost of
Common Shares = US $3,388 million (75,415,536 × US $44.93) + Direct transaction costs
incurred by Hindalco = US $17 million] (Refer to Exhibit 8). Immediately following the
Arrangement, the common shares of Novelis were transferred from Hindalco‟s Acquisition
Subsidiary (i.e., AV Metals) to its wholly-owned subsidiary AV Aluminium Inc. (i.e., AV
Aluminium). Hindalco also assumed US $2.8 billion of Novelis‟ debt for a total transaction
value of US $6.2 billion (Aggregate Purchase Price for Novelis‟ common shares of US $3.4
billion + Novelis‟ Total Debt of US $2.8 billion).

On June 22, 2007, Novelis issued 2,044,122 additional common shares to AV Aluminium
for US $44.93 a share resulting in an additional equity contribution of approximately US
$92 million. This contribution was equal in amount to certain payments made by Novelis
relating to change in control compensation to certain employees and directors, lenders
fees and other transaction costs incurred by the Company. As this transaction was
approved by the Company and executed subsequent to the Arrangement, the US $92
million was not included in the determination of aggregate purchase price (total
consideration) shown in Exhibit 9.

After The Deal

Deal Financing

As per Canadian Law, for acquisition of a company, the bidder had to submit its
commitments from international financial institutions of repute to show that the finances
necessary for paying off the shareholders as well as the existing secured lenders were
available with it. This commitment had to be submitted by the bidder to the Board of
Directors of the bidding company. To fulfil this commitment, Hindalco arranged a loan
facility from international financial institutions of repute viz. ABN AMRO, Bank of America
and UBS on the basis of their corporate guarantee, who were original lead arrangers and
bookrunners.

7 After getting an approval from 99.8 percent of shareholders of Novelis on this merger deal on
May 15, 2007.
8 See Novelis annual report, Form 10-K filed for the fiscal year ended March 31, 2008, pp.123-
125.

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These commitments were presented to the Novelis Board and Hindalco was adjudged the
successful bidder amongst other bids received by Novelis. As soon as the shareholders,
Canadian regulators and other respective regulators approved the acquisition deal, the
funds required to pay off the shareholders were drawn down on 11 th May 2007 through its
wholly-owned subsidiaries AV Minerals (Netherlands) and AV Metals Inc. (i.e., Acquisition
Subsidiary). After that the common shares of Novelis were transferred from Acquisition
Subsidiary to Hindalco‟s wholly-owned indirect subsidiary AV Aluminium Inc. (i.e., a
company established in Canada for this purpose). AV Aluminium Inc. was a wholly owned
subsidiary of AV Metals Inc. which in turn was a wholly owned subsidiary of AV Minerals
(Netherlands) B.V.

Out of US $6.2 billion (i.e., total acquisition value), a total of US $3.48 billion payment was
arranged. In this US $3.48 billion, consortium of banks underwrote the amount of US $3.03
billion at the recourse leg and remaining amount of US $450 million was taken from
treasury operations of Hindalco Ltd. “A US $3.03 billion bridge loan for AV Minerals
(Netherlands) and AV Metals, which were wholly-owned subsidiaries of Hindalco
Industries, was closed on August 16, 2007 via a consortium of 17 mandated lead
arrangers (Refer to Exhibit 9). Original lead arrangers and book-runners ABN AMRO, Bank
of America and UBS (Singapore Branch) funded the deal in May 2007. The dual-tranche
facility was split between the two subsidiaries with a US $2.2 billion financing for AV
Minerals and a US $900 million portion for AV Metals, both with a tenor of 18 months.
Pricing was offered on two levels, 30bp for the first year and 80bp over the London
Interbank Offered Rate (LIBOR) for the remaining 6 months.” 9 “Existing bank loans of US
$1.2 billion refinanced through Asset-Based Lending (ABL), term loan. Existing US $1.4
billion notes continue.” 10

Stock Market Reaction

Kumar Mangalam Birla announced the deal on February 11, 2007 evening. On February
12, 2007 investors dumped almost 7.3 million shares of Hindalco (the highest in nine
months) on the Bombay Stock Exchange (BSE). The stock went into a free fall to
Rs.17,325.28 crore in market capitalization on February 12, 2007, losing Rs.2,759 crore as
compared to February 9, 2007.11 However, Novelis‟ share price hit a new 52-week high of
US $44.01, gained US $5.46, or 14.2 percent, in midday trading on New York Stock
Exchange (NYSE) on February 12, 2007. 12 During a month after the announcement of the
deal, Hindalco reacted negatively and its share price decreased by 28 percent from
Rs.180/- to Rs.130/- (Refer to Exhibit 10). This was something of a surprise taking into
account the fact that there were not any major changes in the fundamentals of the
company. This fall in stock prices was on account of concerns over the highly leveraged
buyout of Novelis (debt funded to the tune of US $2.85 billion). Information which was
discounted in share price decrease was that „though acquisition claims to be strategic in
nature but neither party was going to benefit immediately.‟

9 See http://www.financeasia.com (August 17-23,

2007).
10 See Hindalco-Novelis Analyst Presentation FY2008, p.116
(www.hindalco.com).
11 See CMIE, Prowess.
12 See http://www.boston.com/business/technology/articles/2007/02/12 (M&A Monday: Hindalco
to purchase Novelis).
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Most research houses downgraded the Hindalco stock to „sell‟. 13 DSP Merrill Lynch report
stated that “Novelis‟ valuation was unjustified and the deal was earnings per share (EPS)
dilutive”. Karvy Stock Broking warned that the acquisition could bring down Hindalco‟s
FY2008 consolidated EPS by at least 25 percent to Rs.16.50 from Rs.22/-. “While the
acquisition could enlarge Hindalco‟s revenues on a global scale, the valuation was steep
(double Hindalco‟s current enterprise value (EV)/EBITDA multiple) for an inferior
business”, argued an Enam Securities report.

“On June 14, 2007, Crisil downgraded its long term rating on Hindalco‟s non-convertible
debentures (NCD) to „AA/Stable‟ from „AAA/Rating watch with negative implications‟. The
next day, it also downgraded its rating on Essel Mining‟s NCD to „AA-/Negative‟ from
„AA/Rating watch with negative implications‟ due to deterioration in Essel Mininig‟s
financial risk profile subsequent to additional borrowings of Rs.1500 crore to invest in the
equity of group company Hindalco. The downgrade was largely due to the high-debt taken
for acquisition”.14 Crisil remarked that Hindalco‟s debt protection measures were expected
to remain below par for the rating category over the next 3 years and expected that over
the next 18 months, Hindalco would replace part of debt taken for the acquisition with
equity. Raman Uberoi, Senior Director, Crisil said, “you will see a deterioration in
Hindalco‟s capital structure, interest cover and, ultimately, profitability”. 15 Fitch also
downgraded Hindalco‟s long term rating to „AA/Stable‟ on September 13, 2007.16

Valuation Concerns

The analysts voiced two concerns. First, the price Hindalco finalized to pay for Novelis was
high. Second, the manner in which the deal was being funded might have harmed
Hindalco. As a part of the deal Hindlaco‟s AV Metals had acquired all of the Novelis‟
outstanding 75,415,536 common shares at a price of US $44.93 per share, and all
outstanding stock options and other equity incentives were terminated in exchange for
cash payments. The quoted price of US $44.93 per share was 16.6 percent premium over
the stock‟s closing price on February 9, 2007.17

The funding structure of this deal was remarkably different from the leveraged buyout
model that Tata Steel used to fund the Corus buy. Tata was to buy 100 percent of Corus‟
equity for US $12.1 billion. Only US $4.1 billion of this was being raised by Tata. The
remaining US $8 billion were raised (as debt) and repaid on the strength of the Corus
balance sheet. Effectively, Tata was paying only a third of the acquisition price. This was
possible because Corus had relatively low debt on its balance sheet and was able to
borrow more.

13 See Anand, M, “Hindalco-Novelis: The (Scary) Untold Story”, Business World, February 26, 2007.
14 See
http://www.crisil.com/crisilarchives
15 See Anand, M, “Hindalco-Novelis: The (Scary) Untold Story”, Business World, February 26, 2007.
16 See
http://www.fitchratings.com/corporate/ratings
17 See www.forbes.com

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However, that was not the case with Novelis. With a debt-equity ratio of 5.03:1 (as on
March 31, 2007), it could not borrow any more. So, Hindalco was unable to do a leverage
buyout because of US $2.4 billion debt on Novelis‟ balance sheet. Hindalco would have to
refinance these borrowings, though they would be repaid with Novelis‟ cash flows. Thus,
leveraged buyout could not be applied in this case of acquisition because here Novelis was
already debt ridden and most of the debts were raised with high interest cost. Secondly,
the option of replacement of old loan with a new loan might raise its interest burden further.

Analysts believed that Hindalco was paying too high a price for Novelis that incurred a net
income loss of US $275 million in 2006. Even in 2005, when Novelis had made a US $90
million net profit, its share price never crossed US $30. So, why was Hindalco paying US
$44.93 per share for a loss-making company?

In its guidance, the Novelis management had indicated a pre-tax profit (PBT) of US $35
million – US $100 million for 2007. Going by the optimistic end of the guidance, the price
Hindalco paid translated to a market capitalization/profit before tax (PBT) multiple of 36 on
Novelis‟s 2007 forecast (Refer to Exhibit 11). This was very high. It is pertinent to make
another comparision with Corus here. In March 2006, Corus sold its aluminium rolled
products business to Aleris. The business, with revenues of US $1.83 billion and a PBT of
US $55 million, was sold for US $980 million – or a market capitalization/PBT multiple of
only 18. But Hindalco paid double that (Refer to Exhibit 11).

Hindalco‟s bidding price was also quite high as evident from the multiple (enterprise value/
EBITDA). The multiple was 38.99 when taken the enterprise value as US $6.2 billion and
21.38 when taken the enterprise value as US $3.4 billion (i.e., value of only equity) in 2006
(Refer to Exhibit 12). This was a clear case of overbidding.

Due Diligence

There was some interest of Rusal of Russia and Aleris of USA into Novelis business.
However, the details of the proposal from Rusal and Aleris were not known. Hindalco
made the Novelis board sign a US $100 million break fee, the price Novelis had to pay if it
found another buyer. It also made the board agree on a „new buyer premium‟ of a „few
dollars per share‟ over the US $44.93 per share – only at that price could Novelis entertain
a fresh rival bid. As a result, should a new bidder enter the fray, it would have to pay at
least US $5 per share more than what Hindalco had agreed (i.e., it would have to pay
around US $50 per share). These conditions ruled out last minute surprises and inevitably
sealed the Hindalco-Novelis deal.

Besides, Novelis shareholders approved the transaction (i.e., Novelis shareholders would
receive US $44.93 in cash for each outstanding common share) by an overwhelming
majority (99.8 percent) in a special meeting on May 10, 2007.18 In case of acquisition by
foreign players there were chances of foul play for which every sovereign body was
concerned. In case of acquisition of Novelis by Hindalco the Ontario Superior Court of
Justice, Canada gave the consent in favour of acquisition on May 14, 2007. The European
Union also gave its approval for the acquisition and found nothing monopolistic and
restrictive about the acquisition deal.

18 See http://metalsplace.com/news/articles (Hindalco/Novelis: Merger creates world‟s largest

aluminium roller, June 1, 2007).
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Integration of Opportunities and Challenges

Hindalco wanted to acquire Novelis in spite of financial numbers showing that it was not a
good choice for it. This was because of the following possible reasons:

AV Birla Group, where Hindalco is a flagship company, achieved its target of doubling its
turnover to US $20 billion three years in advance. Novelis would also give Hindalco an
entry into the down-stream business of rolled aluminium products. At that moment,
Hindalco was limited to the upstream business of mining bauxite and converting it into
alumina, and then smelting it into aluminium. “If we earn US $10 for every US $100 of
aluminium we sell, we will now be able to earn another US $10 for every US $100 worth of
aluminium that Novelis processes into rolled products” said Debnarayan Bhattacharya. 19
Globally, about 35 million tonnes of aluminium was consumed in 2006. About 40 percent of
this was rolled products, where Hindalco had no presence. However, Novelis had a 19
percent world share. In India, the rolled products market was expected to grow from
220,000 tonnes to a million tonnes in a few years. China already consumed 2.5 million
tonnes of rolled products.

Novelis had built a new fusion technology that helped in increasing the „formability‟ of
aluminium and making it more suitable for products like sheet metal. This helped to build
cars with more curves. Besides, the low weight of aluminium in relation to its strength
would help in many new applications in the auto industry. “It would take 10 years for
Hindalco to develop such a technology on its own”, said Debnarayan Bhattacharya. 20 It
would also cost US $12 billion to build assets that match Novelis‟ 29 plants in four
continents with current production of 3.3 million tonnes (Refer to Exhibit 13).

Hindalco‟s finished product was aluminium. That is the raw material Novelis used to make
stock for cans, auto parts, etc. On the face of it, this seemed like a perfect synergy. But it
wasn‟t. Hindalco‟s aluminum capacities were all committed to its existing customers.
Similarly Novelis had tied up its raw material supplies from sources with geographical
proximity. Company officials said they wouldn‟t upset these contracts. Thus, it was clear
that both companies would not gain much till the end of the year 2010 (i.e., the period
when the contract would be over). Only from the year 2011, it was possible for Hindalco to
supply aluminium to Novelis at lower cost.

Novelis would form a natural hedge for Hindalco. The latter was charging a higher profit
margin when aluminium prices were high on the LME and vice-versa. Thus, Hindalco‟s rise
and fall in profits depended directly on the aluminium prices on the LME. However, this
would not be the case for Novelis after its disastrous can contracts expired in 2010. After

19 See Anand, M, “Hindalco-Novelis: The (Scary) Untold Story”, Business World, February 26,
2007.
20 Ibid.

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2010, Novelis‟ business model and profitability would be LME independent and it would
earn a steady cash flow. That was the perfect hedge for Hindalco.

But analysts disputed this. “Although Novelis had a leading share in the global rolled
aluminium, it had limited pricing power”, said a DSP Merrill Lynch note issued soon after
the deal was announced.21 This was because the rolled products business was quite
competitive. There were a few strong players like Alcoa (16 percent market share), Norsk
Hydro (6 percent), Alcan (6 percent), Aleris (6 percent) besides leader Novelis (19
percent). Together they controlled 53 percent of the market. The balance 47 percent was
controlled by many smaller players. Often companies sacrificed profits to grow market
share.

Performance Evaluation

“We have learnt many things from Novelis. We began with cultural integration, followed by
finance and technology, and now marketing. For example, the energy efficiency of their
plants was far better than Hindalco‟s. No steamroller approach will work in such
crossborder integration. With Novelis, Hindalco has spread across the globe and our
portfolio of products is a natural hedge to the volatility of aluminium prices. We can bring
Novelis‟s technology into India and make cans and sheets for Indian consumers. The
benefits of the purchase have started to flow in and will be reflected in our annual result”,
said Debnarayan Bhattacharya.22

The audited consolidated result of Hindalco for the year ending 31 st March 200823 revealed
that profit before tax (PBT) and net profit decreased to Rs.2,986 crore and Rs.2,387 crore
respectively in FY2007-08 from Rs.3,662 crore and Rs.2,686 crore in FY2006-07.
However, net sales for FY2007-08 were at Rs.60,013 crore and EBIT at Rs.4,835 crore
that were up by 211 percent and 22 percent respectively over previous year. (Refer to
Exhibit 14). Hindalco‟s operational performance, measured in terms of production
volumes, was also good in FY2007-08. The production volume growth in aluminium metal,
aluminium FRP and aluminium extrusion was 31 percent, 14 percent and 13 percent
respectively in FY2007-08 as compared to FY2006-07. 24 There was significant
improvement in EBITDA and free cash flow for Novelis in FY2007-08. The normalized
EBITDA increased by 62 percent to US $491 million in FY2007-08. 25 Free cash flows also
improved by US $164 million in FY2007-08 as compared to FY2006-07.26

21 See Anand, M, “Hindalco-Novelis: The (Scary) Untold Story”, Business World, February 26, 2007.
22 See Kalesh, Baiju, “Towards Total Integration”, Mint, June 16, 2008.
23 The year includes the performance of Novelis for the period from May 16, 2007 to March
31, 2008.
24 See Press Release, June 20, 2008 (See
http://www.hindlaco.com/media/press_releases).
25
Ibid
.
26 Ibid.
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With a view to derive full synergistic benefits the board of directors of Indian Aluminium
Company (Indal) and Hindalco approved a Scheme of Amalgamation. After obtaining all
requisite statutory approvals including sanction of the Scheme by the Honourable High
Courts at Mumbai and Kolkata, the amalgamation was made effective on March 25, 2008
with appointed date as April 1, 2007.27

There was also an impressive growth in share price of Hindalco after the acquisition of
Novelis, i.e. after May 15, 2007. The compounded annual growth rate (CAGR) in
Hindalco‟s share price at BSE during May 16, 2007 – January 11, 2008 28 was positive at
59.6 percent.29 However, the CAGR during February 1, 2007 – May 15, 2007 was negative
at 55.9 percent.36

Hindalco hadn‟t integrated its human resource management policies with that of its newest
acquisition company Novelis37. “Normally, we allow the company we acquire to run its own
policies before takeover for two to three years before we implement our group‟s own
internal policies including human resource management”, said Aumit Raye, VP-HR,
Hindalco.30 He said that the idea was to give a cool-off time and allow them to understand
our internal policies before we implement our group‟s policy. He also added that cultural
integration was a key issue and a time consuming process.

Looking Ahead

The number of projects under implementation in aluminium industry till May 2007 were 19
totalling Rs.48,957.40 crore and projects announced were 12 totalling Rs.26,999.81
crore.39 Seeing the level of projects, it seemed Hindalco might gain in future.

After the year 2011, Novelis‟ can price issues were being aimed to be resolved. “Its
existing management believes Novelis could generate an annual cash flow of US $400
million and earn a 12 percent return on capital. It also believed that the debt to EBITDA
ratio could be pared to the 2.5x and 3x band from the current 10x to 12x level.” 31 Besides,
with more aluminium capacity at its disposal after 2011, Hindalco might also have had
more synergies with Novelis. Most of its new capacities were coming up on the eastern
seaboard with easy access to Novelis‟s plants in Malaysia and South Korea.
27 See
http://www.moneycontrol.com/stocks/company_info.
28 Period selected till January 11, 2008 because after this date there was an overall decrease
in Sensex.
29 Computed from data available on CMIE, Prowess. 36
Computed from data available on CMIE, Prowess. 37
Novelis was having 12,500 employees in 11 countries.
30 See http://www.livemint.com/articles (Hindalco, Novelis HR integration to take 2-3 years, June
13, 2007). 39
See CMIE, Capex.
31 See Anand, M, “Hindalco-Novelis: The (Scary) Untold Story”, Business World, February 26, 2007.

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Many analysts expected a decrease in aluminium prices after 2011. The average primary
aluminium price at LME was US $2,518 per tonne on September 15, 2008. 32 Standard
Bank believed aluminium prices could come down to US $2,400 per tonne in 2012 which
would pull down Hindalco‟s profit margins. However, Novelis, if revived successfully, it
might not be affected much. Thus, Debanarayan Bhattacharya believed that he had found
the perfect antidote to hedge volatility in aluminium prices at LME.

By 2015, Hindalco was expected to have a global scale of operations, produce high value
added products, marquee customer base, have multi locations and proximity to customers,
and use advanced technology. Hindalco‟s cost advantage, and Novelis‟ technology and
customer base, offered enormous growth potential especially in emerging markets.
Recycled aluminium was an important growth segment going forward with rising power
costs and scarcity of raw material. Hindalco would achieve the desired growth in both
primary as well as recycled aluminium segment. Aluminium is a slow moving industry, so it
could be interpreted that if all the objectives of this acquisition (i.e., reduced price ceiling
exposure, product mix and price gains, volume improvements, leverage on first mover
advantage in high value added product segments in India and working capital
management) were achieved, Hindalco might emerge as yet another Global Power in
aluminium industry from India.

32 See CMIE, Industry Analysis

Service.
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Exhibit 1: Hindalco Growth Path 2000-2008

Year Expansion, Acquisition and Others

2000
Majority stake in Indal through largest all cash acquisition in India.
2001
2002 Copper business acquisition and expansion to 250,000 tpa.

2003 Acquisition of Nifty & Mt. Gordon Copper Mines.

2004 Aluminium Expansion at Renukoot to 342,000 tpa, Hirakud to 65,000 tpa.

Doubling of copper capacity to 500,000 tpa. Listing of Aditya Birla Minerals

Ltd. on Australia Stock Exchange and raising AUD 299 million. Increase
2005
stake in Utkal from 20% to 55%. Further increased to 100% in 2007.

JV agreement signed with Almex for aerospace alloys.

2006
Acquisition of Novelis. Doubling of Hirakud Smelter capacity to 143,000 tpa.
2007
Alumina Expansion at Muri.
2008
Source: Hindalco-Novelis Analyst Presentation FY 2008 (See http://www.hindlaco.com)

Exhibit 2: Financial Statements for the Year Ended 31st December

($ in million, except per share data)

Results 2005* 2006

Net Sales $ 8,363 $ 9,849
Net Income (Loss) 90 (275)
Total Assets 5,476 5,792
Long-Term Debt (including current portion) 2,603 2,302
Other Debt 27 133
Cash and Cash Equivalents 100 73
Shareholders‟/ Invested Equity 433 195
Earnings (Loss) Per Share:

Basic:

Income (loss) before cumulative effect of accounting $ 1.29 $ (3.71)

change
Cumulative effect of accounting change – net of tax (0.08) ---
Net income (loss) per share – basic $ 1.21 $ (3.71)

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Diluted:

Income (loss) before cumulative effect of accounting $ 1.29 $ (3.71)

change
Cumulative effect of accounting change – net of tax (0.08) ---
Net income (loss) per share – diluted $ 1.21 $ (3.71)
Dividends Per Common Share $ 0.36 $ 0.20
* The consolidated and combined financial statements for the year ended December 31, 2005 include the
results for the period from January 1 to January 5, 2005 prior to its spin-off from Alcan, in addition to the results
for the period from January 6 to December 31, 2005.
Source: Novelis Inc., 10-K, March 01, 2007

Exhibit 3: Brownfield Expansions & Greenfield Projects

Brownfield Expansions:
• Expansion of Muri Alumina Refinery from 110,000 tpa to 450,000 tpa during FY07.
• Hirakud Smelter and Power expansions from 65,000 tpa to 146,000 tpa and 67.5 MW to 367.5
MW respectively during FY07 and FY08.
• Extend the refining capacity at Belgaum from 350,000 tpa to 650,000 tpa during FY08.

Greenfield Projects:
• Utkal Alumina, the 1-1.5 million tpa alumina refining project in a JV with Alcan Inc., during FY07.
• Integrated aluminium project, Aditya Aluminium, encompassing 1-1.5 million tpa alumina
refinery, 325,000 tpa aluminium smelter and 650 MW captive power plant during FY07.
• Setting up a Coal Block project in Jharkhand of 325,000 tpa smelter and a 750 MW captive
power plant during FY07.
• Setting up a Coal Block project in Madhya Pradesh with Mahan Coal Company Ltd. of 325,000
tpa smelter and a 750 MW captive power plant during FY07.
Source: Annual Report 2006, Hindalco Industries Ltd. (See http://www.hindlaco.com)

Exhibit 4: Financial Statements of Hindalco Industries Ltd. (March 2002 – March 2007)
(Figures are in Rs. Crore (non-annualised) & pertain to financial year end)
Key Indicators Mar 2002 Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007
Total income 2873.11 5734.69 7064.82 10815.59 12772.55 20262.90
Sales 2663.11 5499.02 6821.23 10465.17 12485.92 19882.19
Income from financial services 198.88 205.47 238.84 163.47 200.05 281.74

Total expenses 2206.41 5176.23 6327.83 9741.88 12153.3 18142.45

Raw material expenses 562.41 2522.68 3282.45 4900.53 6906.38 11471.87
Power, fuel & water charges 428.50 666.46 935.70 1534.79 1820.32 1848.62
Compensation to employees 233.37 297.46 325.27 419.19 593.18 523.60
Indirect taxes 329.09 518.17 614.09 960.44 1091.09 1618.69
Selling & distribution expenses 69.19 165.70 142.51 238.85 249.62 293.83

PBDITA 1249.22 1348.06 1749.58 2638.21 2822.47 4353.70

PBDTA 1159.46 1168.06 1563.12 2439.01 2622.38 4057.43
PBT 1005.00 899.39 1245.67 1975.75 2105.70 3504.63
PAT 686.00 582.14 838.93 1329.36 1655.55 2564.33

Net worth 5717.38 6191.09 6857.90 7666.59 9606.26 12418.04

Paid up equity capital (net of
forfeited capital) 74.46 92.46 92.47 92.78 98.57 104.33

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Reserves & surplus 5642.92 6098.63 6765.42 7573.81 9507.69 12313.71

Total borrowings 957.73 2395.03 2564.60 3800.00 4877.28 7359.24

Current liabilities & provisions 354.06 854.03 1075.70 2518.2 3178.89 4036.90

Total assets 7489.84 10299.24 11497.00 15114.49 18908.11 25007.81

Gross fixed assets 6316.75 6470.39 7126.17 10016.51 11146.79 12539.47
Net fixed assets 3830.93 4863.40 5207.88 6926.51 7615.71 8483.14
Investments 1985.27 2648.43 3377.21 3702.15 3971.30 8804.78
Current assets 1249.30 2348.91 2638.91 4350.41 7114.94 7470.77
Loans & advances 407.99 428.45 269.34 126.03 187.84 178.12
Source: Centre for Monitoring Indian Economy (CMIE), Prowess

Exhibit 5: Production Capacity in Hindalco vis-à-vis Novelis

2005 (in tonnes) 2006 (in tonnes)
Hindalco 190,581* 211,088*
Novelis 2,873,000** 2,960,000**
* Actual production of rolled products against installed capacity of 200,000.
** Shipments of rolled products.
Source: Hindalco Industries Ltd., Annual Report 2007, p.100; and Novelis Inc., 10-K, March 1, 2007, p.51.

Exhibit 6: Production of Aluminium in India

Figures pertain to financial year end

Product/Raw March
Company Material Units 2005 March 2006
Aluminium Ingot,
Bharat Aluminium Co. Ltd. Billet, Alloys, Slab, „000 tonnes 8.61 46.46
Bus-Bar

Aluminium
Hindalco Industries Ltd. „000 tonnes 409.07 429.14
Metal/Ingots

Hiren Aluminium Ltd. Aluminium Rods „000 tonnes 23.30 35.4

Primary Metal
Madras Aluminium Co. Ltd. (Ingots, Billets & „000 tonnes 2.97 2.54
Alloys)

National Aluminium Co. Ltd. Aluminium Ingots „000 tonnes 146.32 163.65
Source: CMIE, Prowess

Exhibit 7: Sales and Market Share of Different Aluminium Companies in India

Sales figures are in Rs. crore & pertain to financial year end

Company March 2005 March 2006

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Market Share Market Share

Sales Sales
(%) (%)
Bharat Aluminium Co. Ltd. 1244.89 7 2161.07 10

Hindalco Industries Ltd. 10815.59 62 12772.55 59

Hiren Aluminium Ltd. 256.27 1 446.68 2

Madras Aluminium Co. Ltd. 358.24 2 433.62 2

National Aluminium Co. Ltd. 4696.20 27 5545.53 26

Century Aluminium Co. Ltd 245.01 1 297.31 1

Source: CMIE, Prowess

Exhibit 8: Summary of Final and Initial Allocations of Aggregate Purchase Price to

Assets Acquired and Liabilities Assumed at the Date of the Arrangement
($ in million)
Final Initial
Assets acquired:
Current assets $ 3,210 $ 3,210
Property, plant and equipment 3,451 3,350
Goodwill 2,157* 2,341
Intangible assets 913 879
Investment in and advances to non-consolidated affiliates 927 762
Fair value of derivative instruments – net of current portion 3 3
Deferred income tax assets 117 117
Other long-term assets 109 110
Total assets acquired 10,887 10,772
Liabilities assumed:
Accounts payable (1,612) (1,612)
Accrued expenses and other current liabilities (750) (738)
Long-term debt, including current portion and short-term (2,824) (2,824)
borrowings
Deferred income tax liabilities, including current portion (1,038) (874)
Accrued postretirement benefits (382) (430)
Other long-term liabilities (723) (736)
Minority interests in equity of consolidated affiliates (153) (153)
Total liabilities assumed (7,482) (7,367)
Aggregate Purchase Price (Total Consideration) $ 3,405 $ 3,405
* In accordance with FASB Statement No. 141, during quarter ended June 30, 2007, Novelis substantially
allocated total consideration (US $3.405 billion) to the assets acquired and liabilities assumed based on its
initial estimates of fair value using methodologies and assumptions that it believed were reasonable. During the
three months ended March 31, 2008, it finalized the allocation of the total consideration to identifiable assets
and liabilities. The final valuation decreased the amount allocated to goodwill by US $184 million from its initial
allocation. This is primarily due to the finalization of its assessment of the valuation of the acquired tangible and
intangible assets, the allocation of fair value to its reporting units, remeasurement of postretirement benefits
and the income tax implications of the new basis of accounting triggered by the Arrangement.
Source: Novelis Inc., Annual Report, Form 10-K, March 31, 2008
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Exhibit 9: Major Sources of Funding

Sl. No. Source US $million
1 ABN AMRO 384.64
2 Bank of America 280.63
3 UBS (Singapore Branch) 280.00
4 Bank of India 185.53
5 ICICI Bank 180.26
6 Mizuho Corporate Bank 180.26
7 Deutsche Bank (Singapore Branch) 178.16
8 Citibank (Bahrain Branch) 175.00
9 Standard Chartered Bank 175.00
10 Sumitomo Mitsui Banking Corp 175.00
11 State Bank of India 170.00
12 Bank of Tokyo-Mitsubishi UFJ 150.00
13 BNP Paribas 135.53
14 HSBC 125.00
15 Rabobank 105.26
16 Calyon 100.00
17 Commonwealth Bank of Australia (Singapore Branch) 50.00
Total 3,030.27
Source: http://www.financeasia.com/ (August 17-23, 2007)

Exhibit 10: Trends of Hindalco’s stock price traded in BSE

(February 1, 2007 – January 11, 2008)

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Exhibit 11: Novelis’s Valuation as Compared with a Peer

All figures are in US $million & pertain to year ended December

Novelis Novelis Corus Aluminium

2005 actuals 2007 guidance* 2005 actuals
Assets 5,476 Not Available 1,328
Sales 8,363 Not Available 1,832
PBT 197 100 55
Market Cap 3,600 3,600 980**
Market Cap/PBT*** 18.27 36 17.81
* Guidance issued by the Corus management.
** Corus Aluminium was sold to Aleris for US $980 million in March 2006.
*** Computed and figures are multiple.
Source: Novelis Inc., 10-K, March 01, 2007 & Corus

Exhibit 12: EBITDA of Novelis

All figures are in US $million & pertain to year ended December
2004 2005 2006
Net income (loss) 55 90 -275
Provision (benefit) for taxes on income (loss) 166 107 -4
Minority interests‟ share -10 -21 -1
Interest expense and amortization of debt issuance costs -
48 194 206
net
Depreciation and amortisation 246 230 233

EBITDA* 505 600 159

* Computed by adding all the items, which have taken from the source mentioned below.
Source: Novelis Inc., 10-K, March 01, 2007

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Exhibit 13: The World of Novelis

th
All figures are in US $million & for nine months ended 30 September 2006
N. America S. America Europe Asia
Assets 1,487 814 2,392 1,021
Net Sales 2,841 626 2,688 1,235
Regional Income 64 122 208 70
10 plants, 2 2 plants, 2 smelters, 14 plants, 1 3
Description of
recycling facilities 1 refinery, 2 bauxite recycling facility plants
assets*
mine
*
Plants refer to aluminium rolled products facilities.
Source: Novelis Inc.

Exhibit 14: Consolidated Financial Highlights

(Rs. Crore) (Billion US$)
Results FY 2006-07 FY 2007-08 FY 2006-07 FY 2007-08
Net Sales 19,316 60,013 4.2 14.8
EBITDA 4,840 7,291 1.1 1.8
EBIT 3,975 4,835 0.9 1.2
Profit before Tax 3,662 2,986 0.8 0.7
Net Profit 2,686 2,387 0.6 0.6
Capital Employed 23,285 56,266 5.4 14.1
Net Worth 12,814 17,346 2.9 4.3
Source: Press Release, 20th June 2008 (See http://www.hindlaco.com/media/press_releases)

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