Kumar Mangalam Birla's Hindalco to acquire Aleris for $2.6 billion

Kumar Mangalam Birla-owned aluminium major Hindalco's North American unit Novelis is acquiring US-based rival Aleris for an enterprise value of $2.58 billion in a fully debt funded deal that will help expand product portfolio into aviation segment as well gain more customers in the automobile sector.

Post the acquisition, the combined manufacturing capacity will go up to 4.7 million tonnes per annum.

"There is a solid strategic rationale in this acquisition. It very importantly diversifies our product mix to include some premium segments where Novelis has not been present, in particular high-end aerospace," said Birla, the chairman of Hindalco and Novelis.

It will also help integrate the assets of two companies in recycling, casting, rolling, finishing capabilities and thus bring more solid operational efficiency and a stronger presence in Asia, he added.

Aleris has a global footprint with manufacturing facilities in Europe, US and Asia. The acquisition will strengthen Novelis' leadership position in the fastest growing automotive segment with assets in Lewisport, US and Duffel, Belgium.

Aleris has invested about $900 million in the last few years in the automotive and aerospace businesses. The ramp up of these capacities in the near-term will bolster Novelis' growth.

Aleris' new facility in Zhejiang, China is in proximity to Novelis' plant in Changzhou and will thus strengthen Novelis' market leadership as an aluminium sheet supplier in the world's fastest growing automotive market, where electric vehicle demand is expected to grow significantly requiring lightweight materials like aluminium for both batteries and vehicle bodies.

"Aleris is a value accretive acquisition for Hindalco and Novelis. It is accretive from the first year itself in terms of cash flows and net profit, which is rare for acquisition as large as this," said Birla.

It will also get access to Aleris' technology and will help Hindalco in its forays into the construction and transport segments.

The acquisition of Aleris, which is subject to regulatory approvals in various markets, will propel Hindalco's revenue to $21 billion and it will have an employee base of around 40,000.

"The potential benefit of this acquisition in terms of synergies is about $150 million on a recurring basis," pointed out Birla.

Hindalco is looking to double its capacity in value added products, for which a capital expenditure of $1 billion over next five years has been earmarked.

Analysts see this acquisition boosting earnings of Hindalco and Novelis.

"Aleris has the potential to increase adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) to $310-325 million by calendar year 2019 (from $200 million)," said Abhishek Poddar of Kotak Institutional Equities in a report.

Hindalco's shares ended down 1.2 per cent at Rs 206.55 on Thursday as investors have been worried over the rise in debt post this deal. Currently, the net debt at Novelis stands at around $3.5 billion. This debt funded acquisition will add another $2.6 billion, say company officials. But, they added that the debt to EBITDA ratio will still be under four, which in two years should come down to around three.