Hindalco's Novelis to buy aluminium products maker Aleris for $2.58 billion

Deal depends on clearances from US, China and EU

Novelis Inc, a 100 per cent US-based subsidiary of Hindalco Industries, on Thursday announced acquiring aluminium products maker Aleris Corporation for an enterprise value of $2.58 billion, giving the Aditya Birla group firm enough room to foray into the high-end and growing aerospace products sector and emerge as a $21-billion company on a consolidated basis.

The acquisition by Novelis Inc will be a 100 per cent debt-funded deal, expected to close in nine to 15 months. Novelis will invest $775 million in the equity and takeover debt of Aleris, and it will be refinanced after the acquisition.

“The acquisition of Aleris is the next phase of our aluminium value-added products growth strategy,” Aditya Birla group Chairman Kumar Mangalam Birla said here. “This will solidify our position as the world’s No.1 aluminium value-added products player. After this acquisition, we will have a presence throughout the downstream aluminium value chain in Asia, positioning us for future growth in the region. This also enhances the access to world-class manufacturing capabilities for our existing Indian aluminium value-added operations and accelerates our path to making world-class products in India,” Birla added.

Hindalco-Novelis is set to become the world’s largest aluminium firm outside China after Aleris buy, Birla told Business Standard.

The deal, however, is subject to regulatory approvals in the US, China and the European Union. The US government could play an important role in clearing the deal. Aleris' owners — Oaktree Capital Group LLC and Apollo Global Management LLC — had earlier agreed to sell the company to Zhongwang USA LLC for an enterprise value of $2.3 billion. 

But the transaction did not take place after US officials raised national security concerns about the Chinese-backed bidder.

But Novelis executives said the clearance would not be a problem despite the trade war initiated by the US against many countries and regions, including China, the EU, and India. “We do not expect any problem in getting US government clearance as Novelis is an American company and has invested billions in the local market — most recently in Kentucky,” said Steve Fisher, president and chief executive officer (CEO), Novelis.

There would neither be any equity issuance by Hindalco or Novelis for the acquisition, nor would there be any listing of Novelis, Birla said.  Fisher said by refinancing the debt of Aleris, Novelis would be able to cut the cost of debt by 400 basis points.

Aleris has 13 high-capability manufacturing facilities in North America, Asia and Europe. Novelis and Aleris, put together, will be a 100 per cent conversion business for Hindalco Industries on a consolidated basis, insulating it from volatility in aluminium prices on the London Metal Exchange.

Aleris has invested $900 million in the business over the past five years. “The only investment in the company we will have to make is up to $350 million in the integration of an auto plant in China over the next two to three years,” said Satish Pai, managing director and CEO of Hindalco Industries. With regard to debt on Novelis’ balance sheet, Devinder Ahuja, senior vice-president and chief financial officer, Novelis, said the acquisition would add $2.6 billion to the company’s current debt of $3.5 billion.

Anjani K Agrawal, Partner and Global Steel Leader, Ernst & Young, said via email: “The consolidation (of Aleris and Novelis) with focus on technology and the knowhow will be immensely value-accretive over a long term for the aluminium business. The timing seems opportune as capital investments by Aleris in the US will be leveraged in a more favourable trade policy environment.”

Hindalco shares closed 1.15 per cent down at Rs 206 on Thursday. The stock has lost 24.5 per cent since January this year as compared to 8.6 per cent rise in the BSE Sensex. 

“Due to the current capacities in the domestic market still being in excess of demand, it becomes imperative to focus on investments in the downstream product market globally. Further, the manufacturing capacity in some of the US and EU markets de-risks from any trade-related disruptions on account of change in duty structure,” said Rahul Prithiani, director, CRISIL Research.