Once Novelis closes the acquisition of Aleris, the company is confident it will get a cheaper source of funding to finance the $2.58-billion deal. The Novelis management remains confident that eventually, it will be high-strength aluminium that will win over high-strength steel. KM Birla, chairman, Aditya Birla Group, Satish Pai, managing director, Hindalco Industries, and Steven Fisher, CEO and president, Novelis Inc, spoke
to Shubhra Tandon & Bhavik Nair on the way forward. Excerpts:
How attractive do you think the deal multiples are compared to some of the recent deals?
Birla: 7.2 as a multiple is quite attractive. It’s on the lower end of the transactions that have happened in this space off late.
Fisher: I think the most important thing to understand here is that they have already spent money. They have got contracts, they are ramping up that will really come up in the next one to two years. And when you factor that in at 7.2 times, compared against industry multiples, it’s hugely attractive and that is without any synergies involved.
When you were looking at the acquisition, did you think that $1.8 billion of debt was high or was it ok?
Birla: We are looking at the enterprise value. So, 7.2 times is a very good valuation. Novelis balance sheet is very strong, they have a debt to Ebitda of less than 3, which is very strong. It goes up a notch and then comes down very smartly in two years time. So, I think that would be the consideration for the situation.
Could you elaborate on the funding of the deal and how reasonable will the borrowing cost be in the current environment?
Birla: We are looking at a fairly significant drop from the current rate of borrowing.
Pai: We have 9-15 months to close the deal. So, we have put some back-stops in place now. At the time we close, we will take a look at the market conditions and decide. Alexis recently did a refinancing where they did some bonds of about $400 million and a term loan. We think that with the strength of Novelis’s balance sheet, we will be able to get better rates, then what Aleris got. So, we see an upside here, but we have to look at it when we close the deal.
Could you give us the amount and the timelines of synergies?
Fisher: We anticipate a $150 million in synergies made up about 50-50 between transformational and traditional. The transformational one is the integration play inside of China taking their downstream assets. We do have to invest there $250-300 million. Once we do that, we will get access to the Chinese metal prices, which are anywhere between $200 and $400 per tonne lower than the per-tonne LME prices. As for the traditional synergies, they will start from day one and take about two-three years to complete.
Do you have any overlaps in customer base and operations? Also, would there be divestments of any non-core facilities going forward?
Fisher: Majority of the businesses don’t overlap. There will be no divestments of any facilities.
How soon do you think regulatory approvals will come in and any hurdles foreseen?
Fisher: The 9-15 months to close a transaction is really based on our view of how long it will take to get through the regulatory processes. We are very confident that we will get through both the anti-trust etc.
Any resistance expected from the labour unions to the deal?
Pai: Not at all. I think the team has done extensive due diligence and visited every plant.
Fisher: We want to grow. We are not shutting down facilities.
Birla: If you think about from the view of employees a strategic investor coming in is much more stability.
Will there be any job losses after the acquisition?
Birla: No. We are talking about growth. There is no question of shutting down any sites or any kind of rationalisation.
Steel companies are also adding value-added product capacities for the auto sector. How do you see the competition?
Fisher: there is absolutely an overlap. We are trying to penetrate steel’s space and steel is fighting back. They are trying to get higher strength steel and we are trying to get higher strength aluminium and the fact is that aluminium is one-third lighter than steel and that is what will drive it’s consumption.
