K M Birla on why Novelis will buy American aluminium products maker Aleris

We bought Novelis for $6 billion and we got equity of $3 billion in the first three years itself, says K M Birla

Ending almost a year of negotiations, Hindalco Industries announced the acquisition of US-based Aleris on Thursday. The acquisition will be made by Novelis, a 100 per cent subsidiary of Hindalco. In an interview with Dev Chatterjee & Aditi Divekar, Aditya Birla Group Chairman Kumar Mangalam Birla talks about the acquisition that would create a $21-billion revenue entity. Edited excerpts:

This is the second big acquisition by Hindalco overseas after Novelis in 2006. Do you think Hindalco had taken the right decision and its shareholders have gained? 

We bought Novelis for $6 billion and we got equity of $3 billion in the first three years itself. So our real capital invested in Novelis was around $3 billion. The value of Novelis today would be $11-12 billion. The acquisition also helped Hindalco move towards value-added products with very high margins.

How did you come across Aleris and why you think it makes sense for Novelis to acquire the company? 

Aleris was in the radar of Satish Pai (managing director and chief executive officer of Hindalco) and Steve Fisher (president and chief executive officer of Novelis, US) for over a year, since Novelis wanted to expand in the value-added products space. There are not many companies like Aleris that fit in terms of our product portfolio perfectly. This was the best fit for Novelis and also the valuation was very attractive.  

How will you fund the acquisition? 

Novelis plans to invest $775 million in the equity of Aleris and takeover the company’s debt. Aleris’ debt will be refinanced by us at 6 per cent, compared with the current 10 per cent interest paid by the company, thereby saving 400 basis points for us. In India, we will get access to high-end technology products such as aerospace.  Aleris will bring in $3 billion of revenue. Novelis has $12 billion of revenues. If we add Hindalco’s $6-billion revenue, then on a consolidated basis, we will become the world’s largest aluminium company outside China.

Do you think this is the right time for Hindalco to unlock the value in Novelis, keeping in mind that Hindalco shares are down 25 per cent since January this year? 

We are not planning to list Novelis at this point of time. The value of Novelis needs to be reflected more in Hindalco’s share price in India. Perhaps investors need to understand the story better. The valuation of Novelis is not reflected in Hindalco’s valuation.  

Do you see any challenges in getting the approval from US authorities considering a bid by the Chinese company was rejected by the US on national security grounds? 

We are very confident in getting approvals from US authorities or from the European Union and no assets need to be sold for this. Novelis is an American company and has invested billions over the years. We employ 4,000 people in the US and post-acquisition, our employee base will be around 40,000. Aleris has invested around 900 million in the last few years in the auto and aerospace business and the ramp-up of this capacity will significantly bolster Novelis’ growth across regions and markets.