Hindalco's Novelis plans develop a Coke snag

Hindalco's hopes of turning around its prized acquisition, Novelis, in three years took a setback today, with a group of bottlers led by Coca Cola taking legal action against the Atlanta-based company on alleged breach of contract for an undisclosed amount.

Although both parties were tightlipped on the details of the lawsuit, which was served on the company's US subsidiary this week, sources in the know said its financial implications would be huge if the court verdict goes against Novelis.

The consortium of North American bottlers led by Coca Cola buys nearly $2 billion worth of aluminium cans a year. Novelis is the largest player there and controls 19 per cent of the world's flat-rolled aluminium production.

An Aditya Birla Group spokesperson said, "We are not in full possession of the facts surrounding the lawsuit. Whatever little we know is subject to confidentiality. We rely on the ability of Novelis to rigorously defend the claim."

Novelis has been hurt by long-term contracts with can sheet buyers that hamper its capacity to pass on increased production costs. Aluminium cans cost 85 to 90 cents per pound, against aluminium's selling price of $1.25 per pound. In other words, Novelis loses on every can it sells under the price cap.

In a filing with the Securities & Exchange Commission, Novelis said the price cap had cost it $350 million in the first nine months of 2006.

Hindalco's proposed acquisition of Novelis is expected to be over by mid-2007 and had been criticised by some analysts who said the 16 per cent premium was a bit high.

When it announced the $6 billion acquisition of the aluminium downstream company, Hindalco said it would be able to turn it around. Novelis reported a loss of $102 million in the third quarter.