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    Kumar Mangalam Birla steers talks to bring home Aleris

    Synopsis

    Kumar Birla stepped in to lead talks with the private equity owners of Aleris to get negotiations moving again.

    kumar-birlaAgencies
    The last time Birla attempted anything this bold was when he paid $5.7 billion for Novelis, the vehicle he’s using now to buy Aleris, 11 years ago.
    MUMBAI: Novelis, the US-based downstream arm of India’s largest aluminium producer Hindalco Industries Ltd, is closing in on a $2.3-2.5 billion acquisition of Aleris Corp.

    Talks between both sides are gathering momentum after a lull of over six months, said several people with knowledge of the matter. The discussions are now being steered by Aditya Birla Group chairman Kumar Mangalam Birla himself, they said. He stepped in to lead talks with the private equity owners of Aleris to get negotiations moving again.

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    This follows talks of more than a year between China Zhongwang Holdings Ltd, that country’s biggest supplier of processed aluminium, and the Cleveland-based aluminium parts maker having floundered on heightened US national security concerns.

    A formal announcement is expected in the next few days, possibly as early as the coming week. Spokespersons of both the Aditya Birla Group and Aleris declined to comment on what they regarded as market speculation.

    “There are no other serious buyers in fray but the talks have been going nowhere even though both sides have been engaged for months, forcing the sponsors to get into the act themselves and resolve it either way,” said an official directly involved on condition of anonymity

    To be sure, Aleris refinanced more than $1 billion of its debt earlier this year, moderating the urgency for a deal.
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    Investment banking sources said Hindalco has already held informal discussions with global banks for financing support that would be required if a deal was reached.

    The last time Birla attempted anything this bold was when he paid $5.7 billion for Novelis, the vehicle he’s using now to buy Aleris, 11 years ago.

    Goldman Sachs is advising the Aditya Birla Group.

    ET reported October 16 last year that Hindalco was weighing a $3.1billion bid for Aleris.

    Aleris declared Chapter 11bankruptcy in 2009, brought low by the global financial crisis and heavy debt taken by TPG, its private equity owner at the time. In 2015, it withdrew plans for a long-delayed initial public offering in a blow to its new owners led by private equity firms Oaktree Capital and Apollo Global Management.

    SCALING UP
    An acquisition of Aleris will help Hindalco and Novelis consolidate further in the can and auto segments, the margins for which have been improving steadily in recent times.

    Novelis has been keen to increase its auto shipments to 25% of the total to tap rising demand for aluminium sheets used for automotive purposes. Novelis derives most of its revenues from the beverage can segment, followed by auto body sheets. It’s gradually moving away from speciality steel, says analysts at Goldman Sachs.

    Aleris recently commissioned its $425-million automotive body sheet (ABS) unit in Kentucky and has already started shipping products from there. The expansion comes as US President Donald Trump has imposed tariffs on aluminium imports.

    A takeover would add 1million tonnes to Novelis’ 3.6-million-tonne downstream capacity, where organic growth usually needs about five years of gestation, brokerage firm Macquarie said in a note. It would also help Novelis increase its presence in North America and Europe — the two biggest contributors to Aleris’ revenue.

    According to JP Morgan, the ABS project in particular would allow Novelis to add capacity quickly and save three years that a greenfield project would take. Novelis clocked $1.2 billion ebitda (earnings before interest, taxes, depreciation, and amortisation) in FY18.

    The company has already undertaken about $3 billion in capital expenditure since the Hindalco takeover to grow its auto lines and other recycling capacity. Between Novelis and Hindalco, the two companies generate $350-400 million of free cash flows every year.

    “Analysts have been pushing the company to spend the cash lying with it,” said a company official, “Of late, the question has been, are we to prepay debt or pursue growth opportunities.”

    Novelis chief executive Stever Fisher said last August that it was looking to boost capacity and serve customers. “We have become a preferred choice for automotive aluminium sheets,” he had said.

    “As more and more automakers turn to aluminium solutions to produce the next generation of vehicles, we are actively looking at opportunities to increase capacity to support our customers and reinforce our leadership position in this growing market.”

    Hindalco managing director Satish Pai had said earlier that the company was considering expanding Novelis’ auto lines in the US and China to tap rising demand from the sector. As of FY17, while the auto segment accounted for 18% of Novelis sales by volume, aluminium cans contributed 60% and specialties the rest.

    Aleris’ $201million adjusted ebitda for calendar 2017 included a $38 million impact of outages at its aerospace and auto facilities.

    The company, in its annual presentation, said aerospace and automotive could have a positive impact of $30 million and $75 million on its Ebitda, respectively, in 2019. That could increase underlying ebitda to $344 million. This doesn’t include any synergy benefits that the company would start incurring.

    However, US regulatory approvals can still be a deal breaker. The Aleris deal, which would have been China’s biggest buyout of an overseas metals processor, is one among many transactions that got caught in the regulatory crosshairs.

    The all-important Committee on Foreign Investments in the US, which vets proposed acquisitions, has effectively frozen several transactions. The Aleris sale drew additional criticism from a group of senators who alleged Liu Zhongtian, the aluminium billionaire and majority owner of Zhongwang, had links with the Chinese army, raising the prospect that proprietary technology used by the US defence services could be compromised.


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