Dr Sadananda Prusty

ecch: 310-284-1 London Business School REF: CS-10-007 Date: 2008

Hindalco vs. Novelis: A Case on Acquisition

Indian aluminium giant Hindalco acquired Atlanta based company Novelis, a world leader in aluminium rolling and flat-rolled aluminium products, on May 15, 2007. This acquisition was done to gain immediate scale and a global footprint. Acquiring Novelis would also give Hindalco access to sheet mills that supplied to can manufacturers and auto companies. By investing in downstream Hindalco would go up the value chain and become a world leader in downstream aluminium rolled products. It was already the biggest producer of primary aluminium in Asia and leader in copper production in India. However many analysts believed that Hindalco had overpaid for a company that was making losses and that aluminium prices would drop by 2011. Would this acquisition prove beneficial for the shareholders? We look upon the aluminium business as a core business that has enormous growth potential in revenues and earnings. Our vision is to be a premium metals major, global in size and reach with a passion for excellence. The acquisition of Novelis Inc. (NYSE, TSX: NVL) is a step in this direction. The combination of Hindalco Industries Limited (BSE: HINDALCO) and Novelis establishes an integrated producer with low-cost alumina and aluminium facilities combined with high-end rolling capabilities and a global footprint. The complementary assets and expertise of the team provides a strong platform for growth and success. Kumar Mangalam Birla, Chairman of Hindalco1

Mentioned during Press Release on 15 May 2007 at Atlanta when Novelis Inc. announced the completion of its acquisition by Hindalco Industries Limited (Source: Novelis Inc.).

th

This case was prepared by Dr Sadananda Prusty, Institute of Management Technology, Ghaziabad, India as a basis for classroom discussion rather than to illustrate either effective or ineffective handling of a management situation. The case study was supported by the Aditya Birla India Centre at London Business School.

Copyright 2008 London Business School. All rights reserved. No part of this case study may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, photocopying, recording or otherwise without written permission of London Business school.

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We are very pleased to complete this transaction with Hindalco. The arrangement has created significant value for Novelis shareholders while at the same time providing new opportunities for the future of the combined company. With the support of Hindalco and the Aditya Birla Group, we will be able to accelerate the Novelis business strategy, leveraging our world-class assets for the production of premium aluminium products. Martha Brooks, President & Chief Operating Officer of Novelis2

Background

Hindalco Industries Limited3 started in 1958 and commissioned its first aluminium facility at Renukoot in Uttar Pradesh in 1962. Based in Mumbai, India, Hindalco (a part of A V Birla group) recorded revenues of approximately US $4.3 billion for the fiscal year ended March 31, 2007. Its products ranged from primary aluminium to downstream roll products and diversified products like alloy-wheels and foils. The company launched The Aluminium Store all across India for retail customers and launched new products like Aura for wheel solutions, Freshwrap for kitchen foils, and Everlast for roofing solution. Being a domestic leader, its primary aluminium was traded in London Metal Exchange (LME) and exported to nearly 30 countries covering North America, Western Europe and Asian region. Hindalcos integrated operations and operating efficiency positioned the company among the most cost-efficient aluminium producers globally. Its profit after tax (PAT) had been continuously increasing (Refer to Exhibit 4) and actual production exceeded installed capacity in 2006 (Refer to Exhibit 5). Hindalcos stock was publicly traded on the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) of India Limited and the Luxembourg Stock Exchange.

Novelis Inc.
Novelis Inc.4, headquartered at Atlanta, Georgia, was formed as a Canadian corporation to acquire and independently carry on most of the aluminium rolled products business operated by Alcan. Novelis was then spun off by Alcan on January 6, 2005 and mainly concentrated on production of aluminium rolled products and aluminium can recycle. The company had been supplying aluminium sheet and foil to the automotive and transportation, beverage and food packaging, construction and industrial, and printing markets. The companys customers included major brands such as Agfa-Gevaert, Anheuser-Busch, Ball, Coca-Cola, Daching Holdings, Ford, General Motors, Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull, Tetra Pak and ThyssenKrupp. Novelis operated in four continents including North America, South America, Asia and Europe, through 36 operating plants including three research facilities in 11 countries as on
2 3

Ibid. See http://www.hindalco.com 4 See http://www.novelis.com & Datamonitor Company Profile-Novelis Inc., May 11, 2007.

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December 31, 2005. The company had been managing its activities on the basis of geographical areas and its activities were organized under four operating segments: Novelis North America (NNA), Novelis Europe (NE), Novelis Asia (NA) and Novelis South America (NSA). Shares of the companys common stock were traded on the New York Stock Exchange (NYSE) and on the Toronto Stock Exchange (TSE) under the symbol NVL. The company suffered a net loss of US $275 million in 2006 as compared to a net income of US $90 million in 2005 (Refer to Exhibit 2). This loss was mainly on account of 39 percent increase in aluminium prices (between September 30, 2005 and 2006), which it was unable to pass on to its customers as per an earlier contract. On February 10, 2007, Novelis and Hindalco entered into a definitive agreement for Hindalco to acquire Novelis.

Rationale for Acquisition

Hindalco Industries Limited, based in India, was the highest domestic producer of aluminium (Refer to Exhibit 6) and had highest domestic market share during FY2005 FY2006 (Refer to Exhibit 7). Its profit after tax (PAT) had continuously increased from Rs.686 crore in FY2002 to Rs.2564 crore in FY2007 (Refer to Exhibit 4). With accelerating domestic growth Hindalco always looked for overseas options through which it could increase their production capacity and explore some new markets for their products. Thus, its main objectives were to increase scale of operation, entry into high-end downstream segment of aluminium, and make a mark on global metal market (i.e., to follow an inorganic growth strategy). When looking for opportunities overseas they usually had two options, i.e. either set up a new plant or extend its business by acquiring a foreign firm. Setting up a new plant option was not suitable due to the very nature of metal business which would require huge investment and more time. Thus acquiring a company like Novelis became the preferred option. The main attractions were the strength of Novelis in its scale of operation and technological superiority. Novelis had a presence in 11 countries and enjoyed a global market share of 19 percent in FRP segment, making it a leader.5 Its client list was quite impressive ranging across different industries like automobile (Ford, General Motors) to construction (ThyssenKrupp) to beverages (Coca-Cola, Anheuser-Busch) to printings (Agfa-Gevaert, Kodak) and others. Analysts believed that Hindalco would capture the total value chain in the aluminium business after acquiring Novelis.6 For Hindalcos investors the advantage is that revenues and share price, is expected to be less vulnerable to aluminium price fluctuations on the London Metal Exchange (LME). Hindalco share price currently has a strong correlation with aluminium prices and they directly track the LME metal price. This is because 83 percent of its EBITDA (earnings before interest, taxes, depreciation and amortization) is sourced from the aluminium business said Debnarayan
5

See Joshi, Akash, Hindalco-Novelis: A Suitable Bonding, The Financial Express, February 12, 2007. 6 Ibid.

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Bhattacharya.7 Experts say the Hindalco-Novelis deal makes sound sense. The Indian company gets access to new technologies and a beverage container market that kicks around 200 billion cans across the world, not to speak of screw caps and bottle closures of every conceivable type. Then there is an Indian market that has traditionally been bottleoriented.8 Its a growth market any way you look at it and yet another sign that India is beginning to think international, said Ajay Kohli, Professor and Isaac Stiles Hopkins Chair in Marketing at Atlantas Emory University. 9 Novelis had 2,960,000 tonnes of actual production whereas Hindalco had only 211,088 tonnes in 2006 (Refer to Exhibit 5). Hindalco was also in the process of a massive expansion and its capacities were expected to touch 1.5 million tonnes by 2012 to become one of the worlds five largest producers from its 13th position in the early 2007.10 This expectation of Hindalco could certainly take shape only with the acquisition of Novelis. With this acquisition, Hindalcos combined revenues would be in excess of US $10 billion, which would help Hindalco to enter the Fortune-500 listing by sales revenues. It would get an entry into Global Leaders Club and also become a leader in 4 continents Asia, Europe, North America and South America (Novelis was already either on top or among top 5 in all continents). The Hindalco-Novelis combine, which would have a current market capitalization of over US $7.5 billion, would propel Hindalco to become worlds largest aluminium rolling company, one of the biggest producer of primary aluminium in Asia and Indias leading copper producer.11 Novelis with its value added products and a global leader, makes a perfect fit for Hindalco. Your Companys position as one of the lowest-cost producers of primary aluminium in the world can be leveraged to make us into a globally strong player. Enormous geographical market and product synergies accrue from this combination. I would also like to point out that primary metal which constitutes almost 50 percent of Hindalcos produce is exposed to the vagaries of the price movement on the London Metal Exchange. Novelis with its valueadded downstream products is by and large free from such vulnerabilities. I believe the Novelis acquisition gives your Company an instant leg-up with its technological sophisticated aluminium products capability apart from a scale and global footprint. Globally Novelis is the best asset as far as flat-rolled aluminium products are concerned. It would have taken your Company over a decade to set up such facilities on its own. The quality of its people, several of whom I have interacted with, is excellent. I do realize that in the short-term it does cause a strain on your Companys Balance Sheet. However, if you look at the bigger picture, this is one of the most striking acquisitions and over the longterm will undeniably create enormous shareholder value.12

7 8

Ibid. See Rajghatta, Chidanand, Novelis Acquisition puts Indian Stamp on every Coke, Budweiser Can, The Times of India, February 14, 2007. 9 Ibid. 10 Ibid. 11 See Press releases of Hindalco on http://www.domain-b.com (Hindalco acquires Novelis for $6billion, February 12, 2007). 12 See The Chairmans (K M Birla) Letter to Shareholders, Hindalco Industries Limited, Annual Report 2006-07, pp.3-5.

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The Deal

On May 15, 2007, Novelis was acquired by Hindalco13 through Acquisition Subsidiary (i.e., AV Metals) pursuant to the Arrangement entered into on February 10, 2007 and approved by the Ontario Superior Court of Justice on May 14, 2007. As a result of the Arrangement, Acquisition Subsidiary (i.e., AV Metals) acquired all of the Noveliss outstanding 75,415,536 common shares at a price of US $44.93 per share, and all outstanding stock options and other equity incentives were terminated in exchange for cash payments14. The aggregate purchase price for the Novelis common shares was US $3.4 billion [(Cost of Common Shares = US $3,388 million (75,415,536 US $44.93) + Direct transaction costs incurred by Hindalco = US $17 million] (Refer to Exhibit 8). Immediately following the Arrangement, the common shares of Novelis were transferred from Hindalcos Acquisition Subsidiary (i.e., AV Metals) to its wholly-owned subsidiary AV Aluminium Inc. (i.e., AV Aluminium). Hindalco also assumed US $2.8 billion of Novelis debt for a total transaction value of US $6.2 billion (Aggregate Purchase Price for Novelis common shares of US $3.4 billion + Novelis Total Debt of US $2.8 billion). On June 22, 2007, Novelis issued 2,044,122 additional common shares to AV Aluminium for US $44.93 a share resulting in an additional equity contribution of approximately US $92 million. This contribution was equal in amount to certain payments made by Novelis relating to change in control compensation to certain employees and directors, lenders fees and other transaction costs incurred by the Company. As this transaction was approved by the Company and executed subsequent to the Arrangement, the US $92 million was not included in the determination of aggregate purchase price (total consideration) shown in Exhibit 9.

After The Deal

Deal Financing
As per Canadian Law, for acquisition of a company, the bidder had to submit its commitments from international financial institutions of repute to show that the finances necessary for paying off the shareholders as well as the existing secured lenders were available with it. This commitment had to be submitted by the bidder to the Board of Directors of the bidding company. To fulfil this commitment, Hindalco arranged a loan facility from international financial institutions of repute viz. ABN AMRO, Bank of America

13

After getting an approval from 99.8 percent of shareholders of Novelis on this merger deal on May 15, 2007. 14 See Novelis annual report, Form 10-K filed for the fiscal year ended March 31, 2008, pp.123-125.

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and UBS on the basis of their corporate guarantee, who were original lead arrangers and bookrunners. These commitments were presented to the Novelis Board and Hindalco was adjudged the successful bidder amongst other bids received by Novelis. As soon as the shareholders, Canadian regulators and other respective regulators approved the acquisition deal, the funds required to pay off the shareholders were drawn down on 11th May 2007 through its wholly-owned subsidiaries AV Minerals (Netherlands) and AV Metals Inc. (i.e., Acquisition Subsidiary). After that the common shares of Novelis were transferred from Acquisition Subsidiary to Hindalcos wholly-owned indirect subsidiary AV Aluminium Inc. (i.e., a company established in Canada for this purpose). AV Aluminium Inc. was a wholly owned subsidiary of AV Metals Inc. which in turn was a wholly owned subsidiary of AV Minerals (Netherlands) B.V. Out of US $6.2 billion (i.e., total acquisition value), a total of US $3.48 billion payment was arranged. In this US $3.48 billion, consortium of banks underwrote the amount of US $3.03 billion at the recourse leg and remaining amount of US $450 million was taken from treasury operations of Hindalco Ltd. A US $3.03 billion bridge loan for AV Minerals (Netherlands) and AV Metals, which were wholly-owned subsidiaries of Hindalco Industries, was closed on August 16, 2007 via a consortium of 17 mandated lead arrangers (Refer to Exhibit 9). Original lead arrangers and book-runners ABN AMRO, Bank of America and UBS (Singapore Branch) funded the deal in May 2007. The dual-tranche facility was split between the two subsidiaries with a US $2.2 billion financing for AV Minerals and a US $900 million portion for AV Metals, both with a tenor of 18 months. Pricing was offered on two levels, 30bp for the first year and 80bp over the London Interbank Offered Rate (LIBOR) for the remaining 6 months.15 Existing bank loans of US $1.2 billion refinanced through Asset-Based Lending (ABL), term loan. Existing US $1.4 billion notes continue. 16

Stock Market Reaction

Kumar Mangalam Birla announced the deal on February 11, 2007 evening. On February 12, 2007 investors dumped almost 7.3 million shares of Hindalco (the highest in nine months) on the Bombay Stock Exchange (BSE). The stock went into a free fall to Rs.17,325.28 crore in market capitalization on February 12, 2007, losing Rs.2,759 crore as compared to February 9, 2007.17 However, Novelis share price hit a new 52-week high of US $44.01, gained US $5.46, or 14.2 percent, in midday trading on New York Stock Exchange (NYSE) on February 12, 2007.18 During a month after the announcement of the deal, Hindalco reacted negatively and its share price decreased by 28 percent from Rs.180/- to Rs.130/- (Refer to Exhibit 10). This was something of a surprise taking into account the fact that there were not any major changes in the fundamentals of the company. This fall in stock prices was on account of concerns over the highly leveraged buyout of Novelis (debt funded to the tune of US $2.85 billion). Information which was
15 16

See http://www.financeasia.com (August 17-23, 2007). See Hindalco-Novelis Analyst Presentation FY2008, p.116 (www.hindalco.com). 17 See CMIE, Prowess. 18 See http://www.boston.com/business/technology/articles/2007/02/12 (M&A Monday: Hindalco to purchase Novelis).

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discounted in share price decrease was that though acquisition claims to be strategic in nature but neither party was going to benefit immediately. Most research houses downgraded the Hindalco stock to sell.19 DSP Merrill Lynch report stated that Novelis valuation was unjustified and the deal was earnings per share (EPS) dilutive. Karvy Stock Broking warned that the acquisition could bring down Hindalcos FY2008 consolidated EPS by at least 25 percent to Rs.16.50 from Rs.22/-. While the acquisition could enlarge Hindalcos revenues on a global scale, the valuation was steep (double Hindalcos current enterprise value (EV)/EBITDA multiple) for an inferior business, argued an Enam Securities report. On June 14, 2007, Crisil downgraded its long term rating on Hindalcos non-convertible debentures (NCD) to AA/Stable from AAA/Rating watch with negative implications. The next day, it also downgraded its rating on Essel Minings NCD to AA-/Negative from AA/Rating watch with negative implications due to deterioration in Essel Mininigs financial risk profile subsequent to additional borrowings of Rs.1500 crore to invest in the equity of group company Hindalco. The downgrade was largely due to the high-debt taken for acquisition.20 Crisil remarked that Hindalcos debt protection measures were expected to remain below par for the rating category over the next 3 years and expected that over the next 18 months, Hindalco would replace part of debt taken for the acquisition with equity. Raman Uberoi, Senior Director, Crisil said, you will see a deterioration in Hindalcos capital structure, interest cover and, ultimately, profitability. 21 Fitch also downgraded Hindalcos long term rating to AA/Stable on September 13, 2007.22

Valuation Concerns
The analysts voiced two concerns. First, the price Hindalco finalized to pay for Novelis was high. Second, the manner in which the deal was being funded might have harmed Hindalco. As a part of the deal Hindlacos AV Metals had acquired all of the Novelis outstanding 75,415,536 common shares at a price of US $44.93 per share, and all outstanding stock options and other equity incentives were terminated in exchange for cash payments. The quoted price of US $44.93 per share was 16.6 percent premium over the stocks closing price on February 9, 2007.23 The funding structure of this deal was remarkably different from the leveraged buyout model that Tata Steel used to fund the Corus buy. Tata was to buy 100 percent of Corus equity for US $12.1 billion. Only US $4.1 billion of this was being raised by Tata. The remaining US $8 billion were raised (as debt) and repaid on the strength of the Corus balance sheet. Effectively, Tata was paying only a third of the acquisition price. This was possible because Corus had relatively low debt on its balance sheet and was able to borrow more.

19 20

See Anand, M, Hindalco-Novelis: The (Scary) Untold Story, Business World, February 26, 2007. See http://www.crisil.com/crisilarchives 21 See Anand, M, Hindalco-Novelis: The (Scary) Untold Story, Business World, February 26, 2007. 22 See http://www.fitchratings.com/corporate/ratings 23 See www.forbes.com

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However, that was not the case with Novelis. With a debt-equity ratio of 5.03:1 (as on March 31, 2007), it could not borrow any more. So, Hindalco was unable to do a leverage buyout because of US $2.4 billion debt on Novelis balance sheet. Hindalco would have to refinance these borrowings, though they would be repaid with Novelis cash flows. Thus, leveraged buyout could not be applied in this case of acquisition because here Novelis was already debt ridden and most of the debts were raised with high interest cost. Secondly, the option of replacement of old loan with a new loan might raise its interest burden further. Analysts believed that Hindalco was paying too high a price for Novelis that incurred a net income loss of US $275 million in 2006. Even in 2005, when Novelis had made a US $90 million net profit, its share price never crossed US $30. So, why was Hindalco paying US $44.93 per share for a loss-making company? In its guidance, the Novelis management had indicated a pre-tax profit (PBT) of US $35 million US $100 million for 2007. Going by the optimistic end of the guidance, the price Hindalco paid translated to a market capitalization/profit before tax (PBT) multiple of 36 on Noveliss 2007 forecast (Refer to Exhibit 11). This was very high. It is pertinent to make another comparision with Corus here. In March 2006, Corus sold its aluminium rolled products business to Aleris. The business, with revenues of US $1.83 billion and a PBT of US $55 million, was sold for US $980 million or a market capitalization/PBT multiple of only 18. But Hindalco paid double that (Refer to Exhibit 11). Hindalcos bidding price was also quite high as evident from the multiple (enterprise value/ EBITDA). The multiple was 38.99 when taken the enterprise value as US $6.2 billion and 21.38 when taken the enterprise value as US $3.4 billion (i.e., value of only equity) in 2006 (Refer to Exhibit 12). This was a clear case of overbidding.

Due Diligence
There was some interest of Rusal of Russia and Aleris of USA into Novelis business. However, the details of the proposal from Rusal and Aleris were not known. Hindalco made the Novelis board sign a US $100 million break fee, the price Novelis had to pay if it found another buyer. It also made the board agree on a new buyer premium of a few dollars per share over the US $44.93 per share only at that price could Novelis entertain a fresh rival bid. As a result, should a new bidder enter the fray, it would have to pay at least US $5 per share more than what Hindalco had agreed (i.e., it would have to pay around US $50 per share). These conditions ruled out last minute surprises and inevitably sealed the Hindalco-Novelis deal. Besides, Novelis shareholders approved the transaction (i.e., Novelis shareholders would receive US $44.93 in cash for each outstanding common share) by an overwhelming majority (99.8 percent) in a special meeting on May 10, 2007. 24 In case of acquisition by foreign players there were chances of foul play for which every sovereign body was concerned. In case of acquisition of Novelis by Hindalco the Ontario Superior Court of
24

See http://metalsplace.com/news/articles (Hindalco/Novelis: Merger creates worlds largest aluminium roller, June 1, 2007).

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Justice, Canada gave the consent in favour of acquisition on May 14, 2007. The European Union also gave its approval for the acquisition and found nothing monopolistic and restrictive about the acquisition deal.

Integration of Opportunities and Challenges

Hindalco wanted to acquire Novelis in spite of financial numbers showing that it was not a good choice for it. This was because of the following possible reasons: AV Birla Group, where Hindalco is a flagship company, achieved its target of doubling its turnover to US $20 billion three years in advance. Novelis would also give Hindalco an entry into the down-stream business of rolled aluminium products. At that moment, Hindalco was limited to the upstream business of mining bauxite and converting it into alumina, and then smelting it into aluminium. If we earn US $10 for every US $100 of aluminium we sell, we will now be able to earn another US $10 for every US $100 worth of aluminium that Novelis processes into rolled products said Debnarayan Bhattacharya.25 Globally, about 35 million tonnes of aluminium was consumed in 2006. About 40 percent of this was rolled products, where Hindalco had no presence. However, Novelis had a 19 percent world share. In India, the rolled products market was expected to grow from 220,000 tonnes to a million tonnes in a few years. China already consumed 2.5 million tonnes of rolled products. Novelis had built a new fusion technology that helped in increasing the formability of aluminium and making it more suitable for products like sheet metal. This helped to build cars with more curves. Besides, the low weight of aluminium in relation to its strength would help in many new applications in the auto industry. It would take 10 years for Hindalco to develop such a technology on its own, said Debnarayan Bhattacharya.26 It would also cost US $12 billion to build assets that match Novelis 29 plants in four continents with current production of 3.3 million tonnes (Refer to Exhibit 13). Hindalcos finished product was aluminium. That is the raw material Novelis used to make stock for cans, auto parts, etc. On the face of it, this seemed like a perfect synergy. But it wasnt. Hindalcos aluminum capacities were all committed to its existing customers. Similarly Novelis had tied up its raw material supplies from sources with geographical proximity. Company officials said they wouldnt upset these contracts. Thus, it was clear that both companies would not gain much till the end of the year 2010 (i.e., the period when the contract would be over). Only from the year 2011, it was possible for Hindalco to supply aluminium to Novelis at lower cost. Novelis would form a natural hedge for Hindalco. The latter was charging a higher profit margin when aluminium prices were high on the LME and vice-versa. Thus, Hindalcos rise
25 26

See Anand, M, Hindalco-Novelis: The (Scary) Untold Story, Business World, February 26, 2007. Ibid.

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and fall in profits depended directly on the aluminium prices on the LME. However, this would not be the case for Novelis after its disastrous can contracts expired in 2010. After 2010, Novelis business model and profitability would be LME independent and it would earn a steady cash flow. That was the perfect hedge for Hindalco. But analysts disputed this. Although Novelis had a leading share in the global rolled aluminium, it had limited pricing power, said a DSP Merrill Lynch note issued soon after the deal was announced. 27 This was because the rolled products business was quite competitive. There were a few strong players like Alcoa (16 percent market share), Norsk Hydro (6 percent), Alcan (6 percent), Aleris (6 percent) besides leader Novelis (19 percent). Together they controlled 53 percent of the market. The balance 47 percent was controlled by many smaller players. Often companies sacrificed profits to grow market share.

Performance Evaluation

We have learnt many things from Novelis. We began with cultural integration, followed by finance and technology, and now marketing. For example, the energy efficiency of their plants was far better than Hindalcos. No steamroller approach will work in such crossborder integration. With Novelis, Hindalco has spread across the globe and our portfolio of products is a natural hedge to the volatility of aluminium prices. We can bring Noveliss technology into India and make cans and sheets for Indian consumers. The benefits of the purchase have started to flow in and will be reflected in our annual result, said Debnarayan Bhattacharya.28 The audited consolidated result of Hindalco for the year ending 31st March 200829 revealed that profit before tax (PBT) and net profit decreased to Rs.2,986 crore and Rs.2,387 crore respectively in FY2007-08 from Rs.3,662 crore and Rs.2,686 crore in FY2006-07. However, net sales for FY2007-08 were at Rs.60,013 crore and EBIT at Rs.4,835 crore that were up by 211 percent and 22 percent respectively over previous year. (Refer to Exhibit 14). Hindalcos operational performance, measured in terms of production volumes, was also good in FY2007-08. The production volume growth in aluminium metal, aluminium FRP and aluminium extrusion was 31 percent, 14 percent and 13 percent respectively in FY2007-08 as compared to FY2006-07. 30 There was significant improvement in EBITDA and free cash flow for Novelis in FY2007-08. The normalized EBITDA increased by 62 percent to US $491 million in FY2007-08.31 Free cash flows also improved by US $164 million in FY2007-08 as compared to FY2006-07.32
27 28

See Anand, M, Hindalco-Novelis: The (Scary) Untold Story, Business World, February 26, 2007. See Kalesh, Baiju, Towards Total Integration, Mint, June 16, 2008. 29 The year includes the performance of Novelis for the period from May 16, 2007 to March 31, 2008. 30 See Press Release, June 20, 2008 (See http://www.hindlaco.com/media/press_releases). 31 Ibid. 32 Ibid.

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With a view to derive full synergistic benefits the board of directors of Indian Aluminium Company (Indal) and Hindalco approved a Scheme of Amalgamation. After obtaining all requisite statutory approvals including sanction of the Scheme by the Honourable High Courts at Mumbai and Kolkata, the amalgamation was made effective on March 25, 2008 with appointed date as April 1, 2007.33 There was also an impressive growth in share price of Hindalco after the acquisition of Novelis, i.e. after May 15, 2007. The compounded annual growth rate (CAGR) in Hindalcos share price at BSE during May 16, 2007 January 11, 200834 was positive at 59.6 percent.35 However, the CAGR during February 1, 2007 May 15, 2007 was negative at 55.9 percent.36 Hindalco hadnt integrated its human resource management policies with that of its newest acquisition company Novelis37. Normally, we allow the company we acquire to run its own policies before takeover for two to three years before we implement our groups own internal policies including human resource management, said Aumit Raye, VP-HR, Hindalco.38 He said that the idea was to give a cool-off time and allow them to understand our internal policies before we implement our groups policy. He also added that cultural integration was a key issue and a time consuming process.

Looking Ahead

The number of projects under implementation in aluminium industry till May 2007 were 19 totalling Rs.48,957.40 crore and projects announced were 12 totalling Rs.26,999.81 crore.39 Seeing the level of projects, it seemed Hindalco might gain in future. After the year 2011, Novelis can price issues were being aimed to be resolved. Its existing management believes Novelis could generate an annual cash flow of US $400 million and earn a 12 percent return on capital. It also believed that the debt to EBITDA ratio could be pared to the 2.5x and 3x band from the current 10x to 12x level. 40 Besides, with more aluminium capacity at its disposal after 2011, Hindalco might also have had

33 34

See http://www.moneycontrol.com/stocks/company_info. Period selected till January 11, 2008 because after this date there was an overall decrease in Sensex. 35 Computed from data available on CMIE, Prowess. 36 Computed from data available on CMIE, Prowess. 37 Novelis was having 12,500 employees in 11 countries. 38 See http://www.livemint.com/articles (Hindalco, Novelis HR integration to take 2-3 years, June 13, 2007). 39 See CMIE, Capex. 40 See Anand, M, Hindalco-Novelis: The (Scary) Untold Story, Business World, February 26, 2007.

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more synergies with Novelis. Most of its new capacities were coming up on the eastern seaboard with easy access to Noveliss plants in Malaysia and South Korea. Many analysts expected a decrease in aluminium prices after 2011. The average primary aluminium price at LME was US $2,518 per tonne on September 15, 2008.41 Standard Bank believed aluminium prices could come down to US $2,400 per tonne in 2012 which would pull down Hindalcos profit margins. However, Novelis, if revived successfully, it might not be affected much. Thus, Debanarayan Bhattacharya believed that he had found the perfect antidote to hedge volatility in aluminium prices at LME. By 2015, Hindalco was expected to have a global scale of operations, produce high value added products, marquee customer base, have multi locations and proximity to customers, and use advanced technology. Hindalcos cost advantage, and Novelis technology and customer base, offered enormous growth potential especially in emerging markets. Recycled aluminium was an important growth segment going forward with rising power costs and scarcity of raw material. Hindalco would achieve the desired growth in both primary as well as recycled aluminium segment. Aluminium is a slow moving industry, so it could be interpreted that if all the objectives of this acquisition (i.e., reduced price ceiling exposure, product mix and price gains, volume improvements, leverage on first mover advantage in high value added product segments in India and working capital management) were achieved, Hindalco might emerge as yet another Global Power in aluminium industry from India.

41

See CMIE, Industry Analysis Service.

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London Business School Exhibit 1: Hindalco Growth Path 2000-2008

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Year

Expansion, Acquisition and Others Majority stake in Indal through largest all cash acquisition in India. Copper business acquisition and expansion to 250,000 tpa. Acquisition of Nifty & Mt. Gordon Copper Mines. Aluminium Expansion at Renukoot to 342,000 tpa, Hirakud to 65,000 tpa. Doubling of copper capacity to 500,000 tpa. Listing of Aditya Birla Minerals Ltd. on Australia Stock Exchange and raising AUD 299 million. Increase stake in Utkal from 20% to 55%. Further increased to 100% in 2007. JV agreement signed with Almex for aerospace alloys. Acquisition of Novelis. Doubling of Hirakud Smelter capacity to 143,000 tpa. Alumina Expansion at Muri.

2000 2001
2002 2003 2004

2005

2006 2007 2008

Source: Hindalco-Novelis Analyst Presentation FY 2008 (See http://www.hindlaco.com)

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Exhibit 2: Financial Statements for the Year Ended 31st December ($ in million, except per share data) Results Net Sales Net Income (Loss) Total Assets Long-Term Debt (including current portion) Other Debt Cash and Cash Equivalents Shareholders/ Invested Equity Earnings (Loss) Per Share: Basic: Income (loss) before cumulative effect of accounting change Cumulative effect of accounting change net of tax Net income (loss) per share basic Diluted: Income (loss) before cumulative effect of accounting change Cumulative effect of accounting change net of tax Net income (loss) per share diluted Dividends Per Common Share 2005* $ 8,363 90 5,476 2,603 27 100 433 2006 $ 9,849 (275) 5,792 2,302 133 73 195

$ 1.29 (0.08) $ 1.21 $ 1.29 (0.08) $ 1.21 $ 0.36

$ (3.71) --$ (3.71) $ (3.71) --$ (3.71) $ 0.20

* The consolidated and combined financial statements for the year ended December 31, 2005 include the results for the period from January 1 to January 5, 2005 prior to its spin-off from Alcan, in addition to the results for the period from January 6 to December 31, 2005. Source: Novelis Inc., 10-K, March 01, 2007

Exhibit 3: Brownfield Expansions & Greenfield Projects

Brownfield Expansions: Expansion of Muri Alumina Refinery from 110,000 tpa to 450,000 tpa during FY07. Hirakud Smelter and Power expansions from 65,000 tpa to 146,000 tpa and 67.5 MW to 367.5 MW respectively during FY07 and FY08. Extend the refining capacity at Belgaum from 350,000 tpa to 650,000 tpa during FY08. Greenfield Projects: Utkal Alumina, the 1-1.5 million tpa alumina refining project in a JV with Alcan Inc., during FY07. Integrated aluminium project, Aditya Aluminium, encompassing 1-1.5 million tpa alumina refinery, 325,000 tpa aluminium smelter and 650 MW captive power plant during FY07. Setting up a Coal Block project in Jharkhand of 325,000 tpa smelter and a 750 MW captive power plant during FY07. Setting up a Coal Block project in Madhya Pradesh with Mahan Coal Company Ltd. of 325,000 tpa smelter and a 750 MW captive power plant during FY07.
Source: Annual Report 2006, Hindalco Industries Ltd. (See http://www.hindlaco.com)

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Exhibit 4: Financial Statements of Hindalco Industries Ltd. (March 2002 March 2007) (Figures are in Rs. Crore (non-annualised) & pertain to financial year end)
Key Indicators
Total income Sales Income from financial services Total expenses Raw material expenses Power, fuel & water charges Compensation to employees Indirect taxes Selling & distribution expenses PBDITA PBDTA PBT PAT Net worth Paid up equity capital (net of forfeited capital) Reserves & surplus Total borrowings Current liabilities & provisions Total assets Gross fixed assets Net fixed assets Investments Current assets Loans & advances

Mar 2002
2873.11 2663.11 198.88 2206.41 562.41 428.50 233.37 329.09 69.19 1249.22 1159.46 1005.00 686.00 5717.38 74.46 5642.92 957.73 354.06 7489.84 6316.75 3830.93 1985.27 1249.30 407.99

Mar 2003
5734.69 5499.02 205.47 5176.23 2522.68 666.46 297.46 518.17 165.70 1348.06 1168.06 899.39 582.14 6191.09 92.46 6098.63 2395.03 854.03 10299.24 6470.39 4863.40 2648.43 2348.91 428.45

Mar 2004
7064.82 6821.23 238.84 6327.83 3282.45 935.70 325.27 614.09 142.51 1749.58 1563.12 1245.67 838.93 6857.90 92.47 6765.42 2564.60 1075.70 11497.00 7126.17 5207.88 3377.21 2638.91 269.34

Mar 2005
10815.59 10465.17 163.47 9741.88 4900.53 1534.79 419.19 960.44 238.85 2638.21 2439.01 1975.75 1329.36 7666.59 92.78 7573.81 3800.00 2518.2 15114.49 10016.51 6926.51 3702.15 4350.41 126.03

Mar 2006
12772.55 12485.92 200.05 12153.3 6906.38 1820.32 593.18 1091.09 249.62 2822.47 2622.38 2105.70 1655.55 9606.26 98.57 9507.69 4877.28 3178.89 18908.11 11146.79 7615.71 3971.30 7114.94 187.84

Mar 2007
20262.90 19882.19 281.74 18142.45 11471.87 1848.62 523.60 1618.69 293.83 4353.70 4057.43 3504.63 2564.33 12418.04 104.33 12313.71 7359.24 4036.90 25007.81 12539.47 8483.14 8804.78 7470.77 178.12

Source: Centre for Monitoring Indian Economy (CMIE), Prowess

Exhibit 5: Production Capacity in Hindalco vis--vis Novelis

2005 (in tonnes) Hindalco Novelis 190,581* 2,873,000** 2006 (in tonnes) 211,088* 2,960,000**

* Actual production of rolled products against installed capacity of 200,000. ** Shipments of rolled products. Source: Hindalco Industries Ltd., Annual Report 2007, p.100; and Novelis Inc., 10-K, March 1, 2007, p.51.

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London Business School Exhibit 6: Production of Aluminium in India

Product/Raw Material Aluminium Ingot, Billet, Alloys, Slab, Bus-Bar Aluminium Metal/Ingots Aluminium Rods Primary Metal (Ingots, Billets & Alloys) Aluminium Ingots

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Company Bharat Aluminium Co. Ltd.

Figures pertain to financial year end March Units 2005 March 2006 000 tonnes 8.61 46.46

Hindalco Industries Ltd. Hiren Aluminium Ltd.

000 tonnes 000 tonnes

409.07 23.30

429.14 35.4

Madras Aluminium Co. Ltd.

000 tonnes

2.97

2.54

National Aluminium Co. Ltd.

Source: CMIE, Prowess

000 tonnes

146.32

163.65

Exhibit 7: Sales and Market Share of Different Aluminium Companies in India

Sales figures are in Rs. crore & pertain to financial year end Company Bharat Aluminium Co. Ltd. Hindalco Industries Ltd. Hiren Aluminium Ltd. Madras Aluminium Co. Ltd. National Aluminium Co. Ltd. Century Aluminium Co. Ltd
Source: CMIE, Prowess

March 2005 Market Share Sales (%) 1244.89 7 10815.59 256.27 358.24 4696.20 245.01 62 1 2 27 1

March 2006 Market Share Sales (%) 2161.07 10 12772.55 446.68 433.62 5545.53 297.31 59 2 2 26 1

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Exhibit 8: Summary of Final and Initial Allocations of Aggregate Purchase Price to Assets Acquired and Liabilities Assumed at the Date of the Arrangement ($ in million) Final Initial Assets acquired: Current assets $ 3,210 $ 3,210 Property, plant and equipment 3,451 3,350 Goodwill 2,157* 2,341 Intangible assets 913 879 Investment in and advances to non-consolidated affiliates 927 762 Fair value of derivative instruments net of current portion 3 3 Deferred income tax assets 117 117 Other long-term assets 109 110 Total assets acquired 10,887 10,772 Liabilities assumed: Accounts payable (1,612) (1,612) Accrued expenses and other current liabilities (750) (738) Long-term debt, including current portion and short-term (2,824) (2,824) borrowings Deferred income tax liabilities, including current portion (1,038) (874) Accrued postretirement benefits (382) (430) Other long-term liabilities (723) (736) Minority interests in equity of consolidated affiliates (153) (153) Total liabilities assumed (7,482) (7,367) Aggregate Purchase Price (Total Consideration) $ 3,405 $ 3,405
* In accordance with FASB Statement No. 141, during quarter ended June 30, 2007, Novelis substantially allocated total consideration (US $3.405 billion) to the assets acquired and liabilities assumed based on its initial estimates of fair value using methodologies and assumptions that it believed were reasonable. During the three months ended March 31, 2008, it finalized the allocation of the total consideration to identifiable assets and liabilities. The final valuation decreased the amount allocated to goodwill by US $184 million from its initial allocation. This is primarily due to the finalization of its assessment of the valuation of the acquired tangible and intangible assets, the allocation of fair value to its reporting units, remeasurement of postretirement benefits and the income tax implications of the new basis of accounting triggered by the Arrangement. Source: Novelis Inc., Annual Report, Form 10-K, March 31, 2008

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London Business School Exhibit 9: Major Sources of Funding Sl. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Source ABN AMRO Bank of America UBS (Singapore Branch) Bank of India ICICI Bank Mizuho Corporate Bank Deutsche Bank (Singapore Branch) Citibank (Bahrain Branch) Standard Chartered Bank Sumitomo Mitsui Banking Corp State Bank of India Bank of Tokyo-Mitsubishi UFJ BNP Paribas HSBC Rabobank Calyon Commonwealth Bank of Australia (Singapore Branch) Total

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US $million 384.64 280.63 280.00 185.53 180.26 180.26 178.16 175.00 175.00 175.00 170.00 150.00 135.53 125.00 105.26 100.00 50.00 3,030.27

Source: http://www.financeasia.com/ (August 17-23, 2007)

Exhibit 10: Trends of Hindalcos stock price traded in BSE (February 1, 2007 January 11, 2008)
Closing Stock Price at BSE
220.0 200.0 180.0

Stock Price (Rs)

160.0 140.0 120.0 100.0

1-Nov-07

1-Jun-07

1-Jul-07

1-Mar-07

1-May-07

1-Feb-07

1-Aug-07

1-Sep-07

1-Oct-07

Date

Source: CMIE, Prowess

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1-Dec-07

1-Jan-08

1-Apr-07

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Exhibit 11: Noveliss Valuation as Compared with a Peer

All figures are in US $million & pertain to year ended December Novelis Novelis Corus Aluminium 2005 actuals 2007 guidance* 2005 actuals 5,476 Not Available 1,328 8,363 Not Available 1,832 197 100 55 3,600 3,600 980** 18.27 36 17.81

Assets Sales PBT Market Cap Market Cap/PBT***

* Guidance issued by the Corus management. ** Corus Aluminium was sold to Aleris for US $980 million in March 2006. *** Computed and figures are multiple. Source: Novelis Inc., 10-K, March 01, 2007 & Corus

Exhibit 12: EBITDA of Novelis

All figures are in US $million & pertain to year ended December 2004 2005 2006 Net income (loss) 55 90 -275 Provision (benefit) for taxes on income (loss) 166 107 -4 Minority interests share -10 -21 -1 Interest expense and amortization of debt issuance costs 48 194 206 net Depreciation and amortisation 246 230 233 EBITDA* 505 600 159

* Computed by adding all the items, which have taken from the source mentioned below. Source: Novelis Inc., 10-K, March 01, 2007

Exhibit 13: The World of Novelis

All figures are in US $million & for nine months ended 30 September 2006 N. America S. America Europe Asia Assets 1,487 814 2,392 1,021 Net Sales 2,841 626 2,688 1,235 Regional Income 64 122 208 70 10 plants, 2 2 plants, 2 smelters, 14 plants, 1 3 Description of recycling facilities 1 refinery, 2 bauxite recycling facility plants assets* mine
* Plants refer to aluminium rolled products facilities. Source: Novelis Inc.
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London Business School Exhibit 14: Consolidated Financial Highlights

Results Net Sales EBITDA EBIT Profit before Tax Net Profit Capital Employed Net Worth (Rs. Crore) FY 2006-07 FY 2007-08 19,316 60,013 4,840 7,291 3,975 4,835 3,662 2,986 2,686 2,387 23,285 56,266 12,814 17,346

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(Billion US$) FY 2006-07 FY 2007-08 4.2 14.8 1.1 1.8 0.9 1.2 0.8 0.7 0.6 0.6 5.4 14.1 2.9 4.3

Source: Press Release, 20 June 2008 (See http://www.hindlaco.com/media/press_releases)

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