The Aleris deal is worth $2.58 billion. About $775 million is through equity which will be paid for Novelis. The balance is debt of Aleris that Novelis will take over,
Kumar Mangalam Birla, Chairman, Hindalco – Novelis, tells ET Now.Edited excerpts: At $2.6 billion, 7.2 times EBITDA, there are fears that maybe, you have paid too much for Aleris. How do you look at the valuation? Those fears are completely unfounded. The way to look at valuation is to see other comparable transactions in the same sector. I would say that 7.2 times is, if not very reasonable, on the lower side in the sector especially given the quality of the asset. Why would you say Aleris is a perfect fit for Novelis and Hindalco? I understand they are into value added products and that will give it a boost, but going forward what is the kind of synergy benefits that you see between the two companies? Aleris is in the same space as Novelis which is aluminium controlled products. Novelis is the world leader globally — the largest in every market that it is in. Aleris is a very high quality, large player, with revenue of about $3 billion. It has 13 very hi-tech manufacturing sites across Europe, the US and China. It gives Novelis a stronger franchise in the auto market and therefore solidifies its position in the auto market.As you know, auto is using more and more of aluminium from the point of view of light weighting to be able to meet environmental norms. It also gives it foray into some new sectors like building and construction. Very interestingly, the high margin aerospace sector with customers like Bombardier, Boeing – all marquee names — come along with the transaction. This transaction is completely financed on the balance sheet of Novelis and that is hugely value creating. How does Novelis finance this transaction? Without getting into too much of complexity, the deal size is $2.58 billion. About $775 million is through equity which will be paid for Novelis. The balance is debt of Aleris that Novelis will take over and the idea is to at some point soon after the takeover, refinance that debt. We believe that Novelis can get the debt at least a couple of 100 bps if not even lower as compared to Aleris. It is all of the balance sheet of Novelis which is the point to underline. Doesn’t Hindalco play any direct role in this transaction? Hindalco plays no role at all in the financing for this transaction. Would there be any change in Hindalco’s inorganic expansion plans, Aditya Aluminium Mahan ? I do not think there is any change in track there. What is important is that as a whole Hindalco is becoming a larger value-added player in terms of its proportion of portfolio.
For the Hindalco Group as a whole, the proportion of value-added products will increase considerably post this deal. It does, it takes the value added part to about 70% plus from practically zero about 10 years ago. It also makes the Hindalco combine the largest aluminium company in the world with the turnover of about $21 billion. Aleris’ deal with the Chinese company did not make the cut because of security reasons. How would you make sure that the deal goes through with Novelis? So I do not know about the previous transaction. It is best to ask them but in our case it is very clear. Novelis has been around for a very long time. Novelis provides employment to almost 7,000 people in the US and in Canada. The intent is to grow, we have no intention of shutting down any facility. The idea is to create more jobs. There’s hardly any overlap in terms of portfolio in the sense that the only common vertical is auto. If you look at auto and you compare the use of aluminium in auto with the use of steel, aluminium is still such a small player that there is no comparative threat at all because of which the permissions might get held up.What would be the combined capacity and where does it put Hindalco in the global pecking order? Hindalco has VAP or downstream product of about 400,000 tonnes per annum. Novelis is about 3.3 million tonnes per annum. Aleris has about a million tonnes per annum. This acquisition makes Hindalco — if you take into account the primary metal production as well — the largest aluminium company in the world. How do you expect this acquisition to play out when it comes to the domestic market? The Indian auto segment is changing quite fast. Electric vehicles could become the norm in some years. Do you see big demand coming up from the Indian auto sector per se? I do not think this transaction is pivoted on the Indian market. This is for the future. Who knows how EV picks up but some elements of technology that Aleris gives us in the building and construction segment would be invaluable to Hindalco in India. There is huge value creation all over. About 11-12 years back, you acquired Novelis for $5-6 billion, It was a big one at that point in time. Do you think the Novelis acquisition played according to script in the next 3-5 years? What kind of upside did you see from Novelis? Yes, it played to the objective that we had like. The objective was to have a much larger portion of downstream products compared to upstream and products and Hindalco at that point in time was only an upstream player. Novelis is a very valuable company today. It would be valued at about $10 to $12 billion. We invested $6 billion and within the first four years Novelis had given back about $3 billion by way of reduction in capital. It is hugely accreted, very valuable franchise and above all it is a global leader. This deal also comes amid fears of a trade war. Have you also factored that in? How do you ringfence Novelis, Aleris to make sure that there are no fresh hurdles along the way? This is largely a localised business. It doesn’t have too much of transportation of material. Therefore, we do not think that the tariff tussle that is happening just now will have any impact on Aleris.Voda-Idea Meger: A New Chapter Starts It is almost like double delight for you. DoT has given the much-awaited approval for the Vodafone-Idea merger. What does it mean for you? It has been a very complex process but from our point of view, it is a new chapter in the telecom business, It is a much larger business. We are talking about 400 million subscribers and we are really excited at the potential of it. Going forward, do you expect the merger to start playing out very soon? What happens next? A lot of internal stuff would precede anything seen from the outside but at the end of the day, the idea is to give the customer a much stronger value proposition. But the competitive landscape and the kind of tariff bloodbath that you have seen over the last few months, do you expect that to continue? That is a little bit of crystal ball gazing, I do not want to get into that. It is difficult to say but I think that one of the ideas behind this merger was to be able to survive and thrive in this very competitive market. You had projected a market share of 36% from the combined entity. Some of the analyst reports say that over the next 1-2 years, they see the combined market share go down to 30% because of the kind of competition that we are seeing. Do you share that kind of a concern? Again, it is very difficult to say but when you have very large capacity and market share, there is some logic in saying that you might lose market share but on the whole a very powerful base to be based from. There will be duplicity of functions with people doing the same role in 22 different circles. How do you ensure very little disruption because in a big merger like this, job losses are feared? These are things that have been planned for the last several months and very much part of any merger — whether large or small. I do not think that we are really worried on that front.Looking for Acquisition in Cement Turning to the cement sector, we see a lot of activity in the cement sector. What is the target for UltraTech? This is by far India’s largest cement company and with demand reviving, how do you see UltraTech play out over the next 12 months? Targets can be on many dimensions but the basic idea is to solidify our position as the country’s largest player by far. We are looking at an acquisition potentially. Of course, the courts will take a final view on that. We are always looking at servicing customers better and providing them with complete solution. It is almost a year since the IBC came into effect. What is your take? Has the law played according to script? Do you think more could be done or are you happy with the way things happened in the last 12 months? First, it is important to recognise the fact that IBC is not just a reform but a very deep reform. When we think about reforms, we think about GST, we think about DeMon no one talks as much about IBC. It has changed the face of the Indian entrepreneurship forever. Having said that, there are some loose ends in a new legislation that need to be ironed out. Other than that, it is very much a step in the right direction. Finally, you have completed a $2.5-billion acquisition, going ahead for the group as a whole. Will acquisition remain one of the prime ways to grow business or would it be a fine balance between organic and inorganic? If you look at the last 10 years, Hindalco has also grown substantially on the back of organic expansion — be it Aditya or Mahan smelters, Utkal Alumina. The real question to ask is what creates most value and on that basis, you need to decide whether inorganic or organic growth is the way ahead.
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