Hindalco closes acquisition of Aleris; becomes world’s largest aluminium company

Hindalco Industries Limited, the Aditya Birla Group metals flagship company, has become the world’s largest value-added aluminium downstream player in the world with a global footprint spanning 49 state-of-the-art manufacturing facilities in North America, Europe and Asia. This feat was achieved after the company’s wholly owned subsidiary Novelis Inc, completed the acquisition of Ohio-based Aleris nearly two years after signing the deal for an enterprise value of $2.8 billion, slightly higher than the initial estimate of $2.58 billion. The deal in indeed a long-term strategic bet, much like Novelis was in 2007, a point which Kumar Mangalam Birla, Chairman of the Aditya Birla Group has underlined.

Aleris will be Hindalco’s second acquisition in the US after Novelis, which it had bought for $6 billion in 2007. Hindalco’s purchase of Novelis was the second biggest overseas deal by an Indian entity after Tata Steel’s $13 billion acquisition of Corus. Aleris was privately held by private equity firms Apollo Management, Oaktree Capital Management and Sankaty Advisors.

Novelis will acquire Aleris’ 13 plants across North America, Europe and Asia. However, as per anti-trust regulatory conditions, the company will have to divest Aleris’ plants in Lewisport, Kentucky, USA, and Duffel, Belgium. In September last year, the US Department of Justice filed an antitrust lawsuit seeking to block the Aleris purchase by Novelis as it was said to be violating the competition norms in the auto parts industry in North America. However, the company obtained a nod from the antitrust body on the condition that the company will sell Aleris’ aluminium sheets operations in Lewisport, Kentucky. The Group is currently negotiating with Liberty House to close Duffel transaction, subject to China approval. It is also in discussion with the US Department of Justice to define timeline and terms for divestment of Lewisport.

The $2.8-billion deal consists of $775 million for the equity value, $2 billion for the assumption or extinguishment* of Aleris’ current outstanding debt and a $50 million earn-out payment. Aleris’ debt levels have increased since the initial acquisition announcement two years ago due to rise in working capital to support the ramp up of operations. The deal will be funded by a one-year bridge loan, a five-year term loan and equity investment. For Hindalco, the debt burden will rise as the company has to take considerable debt to fund the deal. It would raise Hindalco’s consolidated debt by about Rs 16,500 crore.

*Novelis will have to divest Aleris’ plants in Lewisport (US), and Duffel (Belgium). Aleris’ plant in Duffel will be bought by UK-based Liberty House for $337 million. The divestment amount of Lewisport plant is to be worked out. These two will help Hindalco and Novelis to cut down the acquisition price.

Transaction Financing and Funding

Acquisition shall be done via debt funding by Novelis. $1,110 million 1-year bridge loan at LIBOR +0.95% and $775 million 5-year term loan at LIBOR + 1.75% and the remaining would be from ABL and cash* of close to $900 million which gives a total of $2.8 billion price tag for Aleris.

*Cash includes $400 million proceeds from Novelis senior notes issued in January 2020

Advantage Novelis

The Aleris deal will enable Hindalco to further diversify its metals downstream portfolio into other premium market segments, most notably aerospace. In fact, Aleris has long-term supply contracts with aircraft makers Boeing, Airbus and Bombardier. For Novelis, one of the biggest advantages of the deal will be in aerospace. In fact, a report by Emkay, shows that between 2017 and 2036, aerospace demand is likely to grow by 34,000 aircrafts. However, with coronavirus pandemic grounding all airline services across the world, companies facing humongous losses, and demand for travel likely to remain tepid for the next one to two years, it is unlikely that the demand for new aircrafts will rise much in the next few years

The acquisition will also give Hindalco access to aluminium supply market for the building and construction segments. With the addition of Aleris’ operational assets and workforce, Novelis can more efficiently serve the growing Asia market by integrating complementary assets in the region including recycling, casting, rolling and finishing capabilities.

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