Billionaire Kumar Mangalam Birla’s Hindalco Industries Ltd has agreed to buy US aluminium sheet maker Aleris Corp. at an enterprise value of $2.58 billion to create the world’s second-largest aluminium maker.
The acquisition will help Hindalco expand sales in the lucrative automotive and aerospace segments, and is the Indian aluminium maker’s second major overseas acquisition after the purchase of Novelis for $6 billion in 2007. On completion of the purchase of Ohio-based Aleris, Hindalco’s consolidated revenue will rise to about $21 billion.
“The acquisition of Aleris is a great strategic move by Hindalco-Novelis,” said Anjani K. Agrawal, partner and global steel leader, EY. “The timing seems opportune as capital investments by Aleris within the US will be leveraged in a more favourable trade policy environment.”
Agrawal was referring to the Trump administration’s decision to impose a blanket 10% tariff on aluminium imports.
Hindalco agreed to pay $775 million in cash for Aleris and absorb debt of $1.8 billion. The purchase will be fully debt-funded.
“The acquisition of Aleris is the next phase of our aluminium value added products growth strategy. This will solidify our position as the world’s No.1 aluminium value-added products player,” Birla, chairman of Hindalco, said on Thursday. “Post this acquisition, we are well placed to serve our customers across geographies in automotive and now the high-end aerospace segments.”
Aleris has long-term supply contracts with plane makers Boeing, Airbus and Bombardier. The acquisition will also give Hindalco access to the aluminium supply market for the building and construction segments.
The acquisition adds debt of around $2.6 billion to Hindalco’s book, taking its total debt to around $6 billion. However, the company expects to halve debt to about $3 billion in the next two years as investments in Aleris start to generate returns.
In the past five years, Birla has realigned his businesses to reduce debt, unlock value and improve returns to investors. Birla’s UltraTech Cement Ltd has moved aggressively to acquire local cement makers anticipating a demand pick-up led by the government’s thrust on infrastructure development. While the merger of group companies AB Nuvo and Grasim and demerger of Aditya Birla Finance was aimed at unlocking value for investors, the move to merge the group’s telecom unit, Idea Cellular Ltd, with Vodafone India Ltd is aimed at taking on Mukesh Ambani’s Reliance Jio Infocomm Ltd. On Thursday, the Vodafone-Idea merger got the final approval from the government.
The company said the acquisition of Aleris will be through Hindalco’s US subsidiary Novelis.
There is also an earn-out clause, which rewards both parties for performance beyond the base business plan during CY2018-20 for North America. Any excess revenue during this period will be split evenly between Novelis and Aleris, with the cap set at $50 million.
The deal is expected to close in 9-15 months, subject to regulatory approvals in the US, European Union and Asia.
Since last summer, Birla has been scouting for acquisition targets to shore up overseas sales of value-added products. US-based Aleris and Constellium, a Dutch maker of aluminium products, were reportedly on the radar. The owners of Aleris—Oaktree Capital Group and Apollo Global Management—were on the verge of selling the company to Zhongwang, China’s largest aluminium maker but the deal collapsed at the last minute because of national security concerns raised by American authorities.