Hindalco Industries, which is a part of the Aditya Birla Group, will acquire U.S.-based Aleris, a maker of specialty aluminium products for an enterprise value (EV) of $2.58 billion, the India aluminum producer said on Thursday.
Hindalco, which will execute the transaction through its wholly owned subsidiary in the U.S., Novelis, is acquiring Aleris for its capabilities of manufacturing value-added aluminum products that find application in sectors such as aerospace, automotive, buildings and construction, and truck trailers, Aditya Birla Group chairman Aditya Birla said at a press conference in Mumbai.
“The acquisition of Aleris will help diversify our product and customer mix and give us a presence in market segments where we weren’t present in before, like aerospace,” Birla said, adding, "This is in keeping with our strategy on adding high-value and high-margin products to our portfolio, which will reduce our dependence on the LME (London Metal Exchange) and therefore ensure reduced volatility.”
At present, around 61% of Novelis’ product portfolio comprises the cans it makes for food and beverages, while auto constitutes 20%. Post the Aleris acquisition, the share of cans will fall to 47%, while new verticals like buildings, construction, trucks and trailers (8%) and aerospace (4%) will get added.
Birla also stated that Aleris’ technical capabilities in developing high-grade aluminum for sectors such as automobiles will also benefit Hindalco’s Indian operations, since aluminum consumption in the Indian market is shifting from the traditional electrical segment towards newer applications in building, construction and transport.
The $2.58-billion EV will comprise an equity component of $775 million, which Novelis will finance through debt. The remaining portion of the EV is the existing debt on Aleris’ books, which Novelis will assume. Hindalco expects the deal to close over the next nine to 15 months with approvals from the U.S. regulators for the transaction pending. Hindalco may also have to pay an additional $50 million for Aleris, if certain milestones linked to future earnings are met by the company over calendar year 2019-2020.
The consideration that Hindalco is paying for Aleris values the company at 7.2 times the target company’s projected earnings before interest, tax, depreciation and amortization (EBITDA) of $360 billion, which according to Birla is an attractive valuation for the company, given the quality of its assets around the world.
The combined entity (Novelis and Aleris) will have revenues of $21 billion, and aluminum production of 4.7 million tonnes per annum. According to Hindalco, Novelis has a consolidated net debt of $3.5 billion and another $2.6 billion of fresh debt will be added on account of the Aleris acquisition. The management is confident that even with the fresh debt coming on to Novelis’ books, the net debt to adjusted EBITDA (also accounting for future EBITDA accrual from Aleris) will remain at a level of under 4:1, and will further reduce to under 3:1 as operational synergies kick in.
Birla said that the transaction will be value accretive from the first year upon completion of the deal itself–both in terms of profitability and cash flow.
Aleris has an impressive clientele, which procures it aluminum products. In the aerospace industry, the top three aircraft makers–Airbus, Boeing and Bombardier–are all Aleris’ clients with long term contracts. In the automotive industry, all major global carmakers including Jaguar, Land Rover, Audi, BMW, Mercedes-Benz, Honda, Hyundai and Volkswagen do business with Aleris.
“Acquisition of Aleris is a great strategic move by Hindalco–Novelis. Apart from pursuing value added segments, the rationale and key drivers include access to high growth sectors like automotive and transportation, entry into aerospace & defence, truck trailers and construction sectors,” said Anjani K Agrawal, partner and global steel leader at consulting firm EY.
Over the last five years, Aleris has made a $900 million investment to expand its capacity. With the entire investment put on the ground already, Hindalco expects to benefit from rapid capacity ramp up.
“Consolidation of both players with focus on technology and knowhow will be immensely value accretive over a long term for the entire aluminum business. The timing seems opportune as capital investments by Aleris within the USA will be leveraged in a more favourable trade policy environment,” Agrawal added.
Shares of Hindalco closed at Rs206.55 a piece on the BSE on Thursday, down 1.15%. The bourse’s benchmark S&P BSE Sensex gained 0.34% on the same day to end at 36,984.64 points.
