Novelis buy melts Hindalco
Hindalco chairman Kumar Mangalam Birla admitted that their debt would go up but that the group would maintain it at a ‘comfortable’ level.
By TNN |
MUMBAI: HINDALCO Industries’ move to acquire US-based Novelis for $6 billion did not go down well with investors on Monday. The stock plunged 14% to close at about Rs 150 on the Bombay Stock Exchange, almost mirroring
Tata Steel’s fall on the exchanges last month after the steel company bought Anglo-Dutch steelmaker Corus for $12.1 billion.
The fall, one of Hindalco’s biggest on the BSE, wiped off almost Rs 2,760 crore of investor wealth.
Apart from the steep $6 billion in cash payout - which was priced at about eight times Novelis’ EBIDTA - Hindalco MD Debu Bhattacharya admitted that the acquisition would depress his company’s margins as Novelis was facing certain ‘aberrations’ in some supply contracts.
“Yes, our consolidated numbers (earnings) will be affected in 2007,” Mr Bhattacharya told reporters.
“But by 2010, we’ll bounce back,” he added as the contracts would expire by then. UBS was the financial advisor for Hindalco in the acquisition.
“This is a usual industry phenomenon followed by most aluminium sheet producers,” said Hindalco CFO Sunirmal Talukdar. “But what they didn’t foresee was the sharp rise in aluminium prices last year,” he added.
Aluminium prices rose by an unprecedented 30% in 2006 due to restricted metal supplies even as demand from countries like China and India surged due to new measures in the power and consumer goods sectors. “The price rises were unexpected and this led to losses for companies such as Novelis,” Mr Talukdar said, adding that the contracts are scheduled to expire in 2009, after which they would reap the benefits of the acquisition.
But on Monday, Hindalco investors felt the impact, with the stock fall eroding much of investors’ confidence in metal stocks. “It is an expensive deal and is in a totally different line of business,” said a metal analyst with a European brokerage.
India’s largest metals company has a debt of more than Rs 5,000 crore, while much of its earnings are already being used for expansion programmes. The company has said it is likely to spend about Rs 32,000 crore on its expansion programmes, which will raise its aluminium smelting capacity to 1.5 million tonnes from 430,000 tonnes, in the next couple of years.
Tata Steel’s fall on the exchanges last month after the steel company bought Anglo-Dutch steelmaker Corus for $12.1 billion.
The fall, one of Hindalco’s biggest on the BSE, wiped off almost Rs 2,760 crore of investor wealth.
Apart from the steep $6 billion in cash payout - which was priced at about eight times Novelis’ EBIDTA - Hindalco MD Debu Bhattacharya admitted that the acquisition would depress his company’s margins as Novelis was facing certain ‘aberrations’ in some supply contracts.
“Yes, our consolidated numbers (earnings) will be affected in 2007,” Mr Bhattacharya told reporters.
“But by 2010, we’ll bounce back,” he added as the contracts would expire by then. UBS was the financial advisor for Hindalco in the acquisition.
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Novelis, which makes custom made aluminium sheets used in cars and beverage cans, had entered into contracts which do not allow the Atlanta-based company to pass on higher raw material costs. “This is a usual industry phenomenon followed by most aluminium sheet producers,” said Hindalco CFO Sunirmal Talukdar. “But what they didn’t foresee was the sharp rise in aluminium prices last year,” he added.
Aluminium prices rose by an unprecedented 30% in 2006 due to restricted metal supplies even as demand from countries like China and India surged due to new measures in the power and consumer goods sectors. “The price rises were unexpected and this led to losses for companies such as Novelis,” Mr Talukdar said, adding that the contracts are scheduled to expire in 2009, after which they would reap the benefits of the acquisition.
But on Monday, Hindalco investors felt the impact, with the stock fall eroding much of investors’ confidence in metal stocks. “It is an expensive deal and is in a totally different line of business,” said a metal analyst with a European brokerage.
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Hindalco chairman Kumar Mangalam Birla admitted that their debt would go up but that the group would maintain it at a ‘comfortable’ level.India’s largest metals company has a debt of more than Rs 5,000 crore, while much of its earnings are already being used for expansion programmes. The company has said it is likely to spend about Rs 32,000 crore on its expansion programmes, which will raise its aluminium smelting capacity to 1.5 million tonnes from 430,000 tonnes, in the next couple of years.
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Hindalco has offered $44.93 in cash per share for Novelis, which is 17% more than the Atlanta company’s closing price on February 9. Hindalco will put in $450 million, group company Essel Mining will invest about $300 million. Hindalco plans to raise $2.8 billion of debt through two special purpose vehicles. Novelis’ debt of about $2.4 billion will be assumed by the company, Mr Birla said.Start a SIP with as low as ₹500 with ET Money App!
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