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why the deal was a failure
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Hindalco and Novelis2007
Background
•Hindalco Industries Limited is structured into two strategic businesses aluminium and copper with a then annual revenue of US $14 billion and a market capitalization in excess of US $ 23 billion.
•Novelis- the world leader in aluminium rolling (producing 19% of the world's flat-rolled aluminium products) and is also the world leader in the recycling of used aluminium beverage cans.
The Deal
•In 2007, Indian aluminium giant Hindalco acquired Atlanta based company Novelis Inc, a world leader in aluminium rolling and flat-rolled aluminium products.
Motivation for the Acquisition for Hindalco•To become the biggest rolled aluminium
products maker and 5th largest integrated aluminium manufacturer in the world
•To have access to higher-end products and superior technology
•To have low-cost alumina and aluminium production facilities combined with high-end aluminium rolled product capabilities due to vertical integration
Motivation for the Acquisition for Hindalco• To be insulated from the fluctuation of LME aluminium
prices.
• To double Hindalco's turnover in one fell swoop, it catapults the Group right to the threshold of the Fortune 500 group of companies.
• To benefit from the increasing Global and Domestic Demand for aluminums
• Post-acquisition, over 50 % of the group's business could come from operations outside India, which is currently at 30 %, marks its increased internationalisation
• To increase foothold in the very concentrated industry
Funding Structure
• The Enterprise Value of Novelis was $6 billion - $3.6 billion and $2.4 billion debt
• To buy the $3.6 billion worth of Novelis’s equity, Hindalco borrowed almost $2.85 billion and the remaining was funded by the group companies and its cash reserves
• Novelis shareholders received US$44.93 in cash for each outstanding common share, roughly 15 per cent premium to the market price.
Funding Structure
• Hindalco would refinance the $2.4-billion debt on Novelis’s balance sheet, though they will be repaid with Novelis’s cash flows.
• Two special purpose vehicles were set up for the purpose. The first, AV Metals, based in Canada, raised the recourse finance and actually acquired Novelis. The other handled the non-recourse finance.
• Hindalco's treasury contributed $450 million, while SL Iron Ore Mining, another group company, contributed $300 million as debt.
What Went Wrong
•In 2008, with the debt market tightening, Hindalco had to dilute its equity through a 1:3 rights issue to raise a little over $ 1 billion.
•The balance of about $ 2 billion of the bridge loan would have to be repaid by sourcing domestic or international debt financing and liquidation of treasury.
What Went Wrong
•Further, high interest costs, which rose by over 490% loan increased from Rs 3.13 billion in FY07 to Rs 18.49 billion in FY08.
•Finally Hindalco’s earning per share in FY08 dropped to Rs.15.76, from Rs. 26.73 in FY07, a fall of 41%