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February 25, 2007

Will the $6-B Novelis buyout drag down Hindalco?

Announced as it was between the $10 billion plus Vodafone-Hutch and Tata-Corus deals, the Birla Group's $6 billion offer for Canada-based aluminium-rolled products maker Novelis has not received much attention. Businessworld however has a critical analysis of the deal.
There are two parts to the deal. First, Hindalco is to buy 100 per cent of Novelis equity at $44.93 per share. That adds up to almost $3.6 billion...With a debt-equity ratio of 7.23:1, (Novelis) can’t borrow any more. So, the Birlas were unable to do a leverage buyout. To buy the $3.6 billion worth of Novelis’s equity, Hindalco is now borrowing almost $2.85 billion (of the balance, $300 million is being raised as debt from group companies and $450 million is being mobilised from its cash reserves). “We estimate the interest costs on this $2.85 billion will be between Rs 700 crore-800 crore,” says Uberoi. That is almost a third of the Rs 2,500 crore net profit Hindalco may post in 2006-07. (It has reported a net profit of Rs 1,843 crore for the first three quarters of this year.)

...The second big concern is Novelis’s valuation. Analysts believe the Birlas are paying too high a price for a company that incurred a loss of $170 million for the nine months ended 30 September 2006. In its latest guidance, the Novelis management has indicated a loss of $240 million-285 million for the whole of 2006. Even in 2005, when Novelis had made a $90-million net profit, its share prices never crossed $30. So, why is Hindalco paying $44.93 a share for a loss-making company?

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.