Hindalco completes another global splash with Aleris

For one of India’s largest manufacturer of aluminium and copper, the Aleris deal comes at the appropriate time. Global industrial metal prices have already taken deep cuts on the back of weak Chinese demand and Aleris is more of a downstream player.

Apr 17, 2020 01:04 IST India Infoline News Service

Back in 2007 when Hindalco made the rather ambitious acquisition of Novelis of Canada, analysts were sceptical about the top-dollar paid for the transaction. Over the last 12 years, Hindalco has managed to consolidate the operations effectively and such ambitious global acquisitions have become the norm among commodity players today. It is in this light that the completion of the $2.8 billion Aleris acquisition deal needs to be looked at.

Aleris deal helps Hindalco stock form a bottom


Data Source: London Metals Exchange (LME)

One way to assess any acquisition deal is to look at the stock price. Aleris deal has surely helped Hindalco stock to make a bottom and rally 50% in a span of just 20 days. For one of India’s largest manufacturers of aluminium and copper, the Aleris deal comes at the appropriate time. Global industrial metal prices have already taken deep cuts on the back of weak Chinese demand and Aleris is more of a downstream player. This is also continuation of the Group’s reiteration of its inorganic approach to growing the aluminium business.

Aleris acquisition is about a splash in value-added aluminium
The $2.8 billion paid for Aleris by Novellis is less than half of what Hindalco paid for Novelis 13 years back. But the real focus of buying Aleris has been on the value added space. The above LME chart captures the risk of a pure upstream commodity approach. Aleris has been among the focused suppliers of value added aluminium products to the aerospace industry. Aleris counts among its clients; marquee names like Boeing, Airbus and Bombardier with long term contracts. For the AV Birla group, the Aleris acquisition is about shifting the focus of Hindalco towards becoming a major value-added player.

De-risking the aluminium business model
One of the big challenges Hindalco faced in the last few years (like most metals companies) is the vulnerability to vagaries of LME prices. The Aleris deal will substantially insulate Hindalco from the global price fluctuations due to the focus on the aerospace and transport industry. Kumaramangalam Birla has constantly spoken about moving more of its business downstream so as to reduce the dependence on the pure commodity franchise. Aleris brings over 13 plants across Europe and the US into the Hindalco portfolio!

How will the deal impact the financials of Hindalco?
The $2.58 billion deal will entail $1.80 billion of debt takeover and $780 million payments in cash. With Novelis sitting on cash pile of close to $1.8 billion, servicing the bank borrowings should not be much of an issue. In terms of financial risk, the impact will be short term. For FY20, the Net debt to EBITDA ratio is expected to increase from 2.4X to 3.2X. However, the Net Debt / EBITDA ratio is expected to taper back to 2.6X by FY21. To that extent, the financial risk created by funding the acquisition is expected to be limited and time-bound.

In his post-deal press conference, Mr. Birla had spoken at length about the importance of taking audacious and calculated risks in challenging times. For Hindalco, the next few quarters could be the real test of its big downstream bet!

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