News: Birla hits the Fortune 500 3 years ahead of schedule

(DNA 12/02/2007) Mumbai - If the Tatas pulled off a multi-billion-dollar acquisition, can the Birlas be far behind?

Hindalco Industries, a flagship company of the Aditya Birla group, on Sunday announced an agreement to acquire Novelis Inc, the largest flat-rolled aluminium maker in the world, for $6 billion (Rs 26,400 crore), which includes $2.4 billion of debt on the books.

The all-cash deal will involve payment of $3.55 billion in cash to Novelis shareholders, at $44.93 a share. The Novelis share closed on Friday at $38.54 on the New York Stock Exchange.

Announcing the deal, Kumar Mangalam Birla, chairman of the Aditya Birla group, the fourth-largest Indian business group by sales turnover ($12 billion at last count), said: "The deal will catapult the group to the Fortune 500 list three years ahead of what we had targeted." Birla had spoken of his Fortune 500 ambitions in DNA Money's inaugural issue on July 30, 2005.

The deal, when consummated in the second quarter this year, will also catapult Hindalco to No 5 rank globally as an integrated aluminium player. On the Birla radar for some time now, Novelis Inc is the world's largest flat rolled aluminum maker, and will thus make Hindalco No 1 by far in this category. Novelis has been a loss-making company waiting to be acquired. Its woes stem from the fact that it has no captive source of bauxite, which forces it to buy alumina, the main raw material, from the spot markets.

In the nine months to September, 2006, Novelis had reported a loss of $170 million largely because it is locked into fixed-price contracts with many customers that run upto 2011. Birla will have to carry the can till then.

The story line for the Birla deal almost runs parallel to what Tata Steel's logic was in acquiring Corus Group for $12 billion.

It will give Hindalco a quick entry into value-added aluminum products that include sheet metal for cars and cans for beverages. "We need technology. We need to move into the high end of the aluminum market", says Debu Bhattacharya, managing director of Hindalco.

Hindalco, like Tata Steel, is also in the midst of a gargantuan greenfield capacity expansion plan that'll cost it a whopping sum of Rs 25,000 crore.

The young scion of the Birla family, 39, who's known for his tenacity when pursuing an acquisition, brought along his mother, Rajashree, also the vice-chairman of his group, and his wife Neerja to the press conference.

"We have been conservative with our business and we'll remain very competitive", says Birla, who admitted that Hindalco will face the pangs of acquiring Novelis for a couple of more years. While $2.8 billion of the funds required will come from recourse financing, the balance of $750 million will come from Hindalco and group company Essel Iron Ore Mining.

The Birlas were confident that a repeat of Corus, where the initial Tata bid faced a challenge from CSN of Brazil, is unlikely. "We have secured the Novelis board's support on Hindalco's offer of $44.93 a share." The price represents a premium of about 17% over the stock's closing price on Friday last week."

The Birlas are certain that they have locked in the deal, thanks to the shrewd manner in which they have structured it. Any interloper walking in late to place a bid will have to pay US $100 million (Rs 441 crore) as breakoff fee to the Birlas. The Birlas have also put in a clause in the agreement that any new bid has be at least $3-4 higher than what they have promised to pay. "I can bet that we'll get it," says Debu Bhattacharya.