A Novel Buyout

Hindalco's move to acquire a 51 per cent stake in India Foils through a combination of a preferential allotment and a negotiated deal sets a new trend. While ensuring that Hindalco gains management control of the company, it results in a funds inflow into the cash-strapped India Foils. This would not have happened in the event of a secondary market acquisition coupled with an open offer. While the share price uptrend has been arrested as the market was expecting an open offer, India Foils' shareholders should take heart from the change in management. Infusion of superior financial and managerial resources should see the company's performance improve considerably.

The deal ensures that the Williamson Magor group retains a 22.4 per cent shareholding, enough to ensure its interest in the company, without affecting Hindalco's control. India Foils' balance sheet needs some drastic restructuring. This will need the co-operation of the Williamson group and will also take some time --estimated at about eighteen months.

India Foils has invested about Rs 11 crore as equity and loans in a subsidiary, Metals Centre, which is an investment company and has accumulated losses of Rs 1.18 crore. This is being bought over by the Williamson group. Then, there are investments totalling Rs 34 crore (there is a shortfall of Rs 15.67 crore in the market value of long term investments) which need to be liquidated. Loans and advances stand at Rs 53.25 crore which also need to be recovered which may take time, and there may be some bad debts which may have to be made good by the promoter group.

Ultimately, Hindalco expects these and its own funds infusion to result in a cash inflow of approximately Rs 125 crore, which will be used to repay part of its debt of Rs 285 crore. This will take care of the huge interest burden, which alone has eaten away more than half its operating profit in 1997-98. Hindalco will next have to focus its attention on making the business more profitable by improving operational efficiencies. One advantage is that it can supply metal at lower than market rates to the company. The acquisition gives it locational advantage, enabling it to lower its distribution costs. The acquisition, while yielding significant returns only in the long term, ensures that Hindalco gains a strong position in this value-added product segment.