Hindalco announced the acquisition of Aleris in July 2018 through its wholly-owned subsidiary Novelis, for an enterprise value of $2.58 billion.
Acquisition of Aleris Corporation will help Aditya Birla Group company Hindalco Industries to cement its position among the leading aluminium players in the world, although gains may be truncated as the deal without automotive capacity may put brakes on its original plans of going big on the high-margin automobile segment. However, access to other high-end segments like aerospace and building & construction (B&C) will remain, where the opportunity is lucrative.
With the completion of the acquisition, product portfolio of Novelis, the wholly-owned subsidiary of Hindalco that acquired Aleris, is expected to diversify further. However, with conditional approvals from the US antitrust authority, under which the company has to sell Aleris’ Lewisport, Kentucky facility in the US, and the sale of the Duffel plant in Belgium on the order of the European Commission, the company’s plans to increase presence in the auto segment may suffer some setback, say analysts.
“The benefit of the acquisition appears significantly diluted without auto assets and bleak outlook for aerospace in the medium term,” analysts at Kotak Institutional Equities observed.
Over the last 8-9 years the company’s portfolio through its US subsidiary Novelis has been shifting from predominantly can and foil manufacturer to products which garner higher margins. To be sure, in financial year 2008-2009, auto formed a mere 4% of the entire product offering, while high-end specialities formed 14%, foil 24% and cans the maximum at 58%.
In the financial year ended March 31, 2018, the share of auto and specialities jumped sharply to together form 39% of the product mix (18% in FY09), while cans held majority share with 61%. At present, the product mix is distributed equally between auto and speciality, and cans. Auto and speciality together hold 48% in product mix, while cans form the remaining 51%.
According to analysts, the share of can for instance could come down to about 43% post completion of the Aleris acquisition, from the present 51%, while the share of auto will stand at 22% (26% at present). However, specialities remaining at 18%, the company will add 13% in building & construction, truck trailer segment (compared to 8% envisaged at the time of announcement), and 4% will get added in the aerospace segment, KIE points out.
Hindalco announced the acquisition of Aleris in July 2018 through its wholly-owned subsidiary Novelis, for an enterprise value of $2.58 billion. The final close of the transaction has happened at a shade higher at $2.8 billion announced on Tuesday.
Novelis will acquire Aleris’ 13 plants, taking its global footprint to 49 manufacturing facilities in North America, Europe and Asia. The acquisition will create a $21-billion company by revenue, and will mark Novelis’ foray into the high-end technology-driven aerospace segment with technological capabilities in manufacturing and research and development in Aleris’ facility in Germany. It will also generate synergies to the tune of around $150 million.
The acquisition will also further Hindalco’s plans to strengthening its downstream capacities. The company has earlier said that benefits from Aleris would accrue through the continuous cast business as Indian markets shift to higher aluminium usage in building and construction and truck trailers. With that in consideration, Hindalco is in the midst of doubling its value-added capacity.
Hindalco Industries managing director Satish Pai had earlier told FE that building and construction, and affordable housing are the new sectors where aluminium demand is growing. “They need the value-added products, and seeing the demand most of our new investments are going into it,” he said. Pai said that while the value-added aluminium’s contribution is very low for Hindalco at about 5% of Ebitda, the company wants to swing it to about 15% by the year 2023.
However, analysts have said that the acquisition will lead to an increase in Hindalco’s leverage, which is discomforting. “With interest coverage of 2.5x and FCF generation, we see the near-term spike in leverage manageable. Nonetheless, increase in leverage is discomforting given downside risk to earnings in FY2021E if COVID-19 led disruptions extend beyond one quarter,” analysts at KIE noted.