Aditya Birla Chairman KM Birla On Novelis' Latest Aquisition, Aleris

Who is special in this case? I'm going to show you what I've done in the last minute things. Good afternoon and welcome to this media conference. Before I start, let me introduce my colleagues on the dais. On my far right, we have Deba, who is the CFO of Novelis. On my right, all of you know Satish. On my left, we have Steve Fisher, who is the CEO of Novelis. And after him, there's Praveen Maheshwari, the CFO of Hindalco. We are pleased to inform you of another milestone in the metals business. All of you know Novelis very well. And Novelis today has signed an agreement to acquire a company named Aleris. Let me tell you a little bit about Aleris. Aleris is one of the leading privately held aluminum rolled products companies globally and is to be acquired by Hindalco for $2.58 billion. Before getting into the details about Aleris, let me walk you through the current position of Hindalco. Hindalco, as you know, is a leading global player in the non-ferrous metal segment. With Novelis, it is globally the number one player in the aluminum downstream business and also a major player in the copper segment. Hindalco has had a phenomenal track record of performance, including in project implementation. Last year was a remarkable year on every front: record production of both aluminum and copper, highest shipments at Novelis, highest revenue of $18 billion, and highest EBITDA for the company of $2.2 billion. All plants operated most efficiently. For instance, both the new smelters, Aditya and Mahan, are among the lowest cost globally. At the same time, Utkal Alumina in Odisha is among the lowest cost alumina producers globally. Birla Copper is one of the largest copper custom smelters at a single location in Asia. Let me now take you through the key terms of the definitive agreement that Novelis has signed today. Novelis has entered into a definitive agreement to acquire Aleris for an enterprise value of $2.58 billion. This is broken up into $775 million for the equity part, with the balance being debt of $1.8 billion. This is debt that Aleris has on its balance sheet that Novelis will be acquiring. Additionally, there will be an earn-out payment of $50 million. My colleagues can take you through that in more detail in the Q&A. There will be no equity issuance, not from Hindalco or Novelis, so the deal will be fully financed on the books of Novelis. We expect the transaction will close in the next 9 to 15 months, and I believe this is the right opportunity for Novelis at the right time. Let me talk about Aleris in more detail. Aleris is a leading global aluminum rolled product company with a diverse range of products, supplying both aerospace and automotive sheets. It is a leader in building and construction and truck trailer segments in North America. Aleris has multi-year agreements with blue-chip customers. Its shipments in 2017 were about 800,000 tons, with revenue of $3 billion, making it a substantial player in the downstream aluminum rolled market globally. It employs about 5,400 people and has 13 high-capability manufacturing facilities across North America, Europe, and Asia. It has invested around $900 million in the last 2 to 4 years, and we believe these investments will start to drive earnings and cash flow momentum from the next financial year. As I mentioned, Novelis is the world's number one aluminum rolled products player, and post acquisition, the combined entity will have a capacity of 4.7 million tons per annum, including Hindalco in India. This acquisition will solidify Novelis' position as a global leader. The key highlights: Aleris is on the cusp of transformational growth, having invested almost $900 million in new assets to support its aerospace and automotive businesses. I see great opportunities to use Novelis' know-how to leverage Aleris' production assets. The strategic rationale is solid: it diversifies our product mix to include premium segments like high-end aerospace where Novelis has not been present, integrates both companies' assets in Asia, and brings enhanced operational efficiencies. This deal helps meet growing demand in the fastest-growing aluminum automotive market, China, which is growing globally at 14% per annum, and it diversifies and de-risks our customer base. Regarding funding, it will be 100% debt-funded on Novelis' books. Looking at pro forma financials, the net debt to adjusted EBITDA for the combined entity at Novelis is forecast to peak below 4 times at close and come back to 3 times within two years. Hindalco's net debt to EBITDA is projected to stay below 3.5 times at close and come down to 3 times within two years. Aleris helps diversify and enrich Novelis' product portfolio. Currently, Novelis' sales are 61% beverage cans, 21% auto, and 19% specialties. After acquisition, new sectors like aerospace, building and construction, and truck trailers come into the fold. Auto share goes from 20% to 22% for the combined entity, and with organic expansion and investments like Lewisport, auto share will increase to 30% over the next few years. Beverage cans will remain at 47%. This gives us presence in high-margin segments like aerospace. Aleris has a world-class R&D center in Koblenz, Germany, and established manufacturing in Europe and Asia. Aluminum demand in aerospace is growing, and Aleris has long-term contracts with Airbus, Boeing, and Bombardier. The acquisition solidifies our position in value-added products and enhances our competitive position in Asia. We have announced a 100,000-ton expansion of auto finishing line in China, and Aleris has a facility in Zhenjiang, deepening our presence in China. These plants complement each other to serve the fastest-growing automotive market. This acquisition enhances our ability to innovate high-strength, lightweight aluminum solutions to compete against steel in automobiles. It widens our automotive customer base and vehicle platform base. Aleris has key strategic assets like new finishing lines in Lewisport, Kentucky, with significant volume already contracted. There is also over 100,000 tons of automotive capacity in Duffel, Belgium. The larger and diversified asset base de-risks us by expanding the customer base. Now, how this impacts Hindalco in India: the Indian aluminum market is at an inflection point. Consumption is skewed toward electrical and auto sectors, but we see rapid growth in building and construction, transport, railways, aerospace, defense, and solar panels. The next phase of growth in India will be in flat-rolled products and extrusions. Hindalco plans to double its value-added product capacity in the next 5 years, with a capex of $1 billion. Access to Aleris' cost-effective continuous cast capabilities will boost Hindalco's ambitions in building and construction and transport sectors. This will bring expertise in making higher-end products in India and contribute to the Make in India program. In summary, Aleris is a value-accretive acquisition for Hindalco and Novelis. It is accretive from the first year in terms of cash flows and net profit, which is rare for an acquisition this large. Novelis, already the world's largest rolled product company, will solidify its position and emerge with a more diversified portfolio. The combined entity will have strong financials, and potential synergy benefits are about $150 million on a recurring basis, achieved through operational integration, supply chain, and sales optimization. The acquisition is at an enterprise value of $2.58 billion, with an expected EBITDA of $360 million post-closing, leading to an attractive EV/EBITDA of 7.2 times. Net debt to EBITDA for Novelis will peak below 4 times and come down to 3 times within two years. At Hindalco, it will stay below 3.5 times and come down to below 3 times within two years. The combined entity will have revenue of $21 billion and about 40,000 employees, making it the largest aluminum company outside China and the second largest globally. Thank you. Very happy to take questions.

As you know, the difficult part of answering questions I never do, right? So, I'm going to request Steve to take this question.

It's in keeping with Hindalco's and Novelis' strategy of getting into a higher value-added product mix, essentially higher margins, less dependent on the LME, and therefore much lower volatility. Those are the two key reasons.

That's a good question, but I don't think anyone has an answer except for one person, and we don't know how he thinks. I don't think it can create any large variance. Steve, you want to add?

Like Steve said, that has had only a marginal impact, and we don't know how long the duties will be there. I don't think that has been factored into any return calculation for this acquisition.

In a situation like this where news comes out partly, there is always some confusion, which typically makes the stock react as it has. Once investors have complete information and realize that the multiple is only 7.2 times given the EBITDA of $360 million in the year we take over, I believe they will view this as a very positive development.

It's a very exciting journey ahead of us with Idea and Vodafone coming together. The actual work starts now. We are very optimistic about it.

Okay, we draw this session to a close. Thank you for attending, and we hope to get a positive response from all of you.