January 10, 2018 / 2:28 AM / 5 months ago

BREAKINGVIEWS-Indian tycoon has golden opportunity in aluminium

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Una Galani

MUMBAI, Jan 10 (Reuters Breakingviews) - Kumar Mangalam Birla is shifting gears. The Indian tycoon has been feverishly tidying up his cement-to-textiles empire, based around the flagship Aditya Birla Group. Now a $2.5 billion bid from affiliate Hindalco for U.S. aluminium products-maker Aleris, as reported by Bloomberg, suggests growth is back on the agenda.

Birla has been busy. Last year he agreed to merge his local telecoms operator, Idea Cellular, with Vodafone India after Mukesh Ambani’s Jio upended the market, and also completed the complex merger of two holding companies. Now Hindalco, his separately listed $10 billion metals giant, is on the prowl, as one of several mooted bidders for Aleris.

Private equity-owned Aleris is back on the block after U.S. officials raised national-security concerns about a $2.3 billion sale to the Chinese-backed Zhongwang USA. By contrast, Indian bidders carry less stigma thanks to New Delhi’s relatively lower barriers to inward investment, and because there is less controversy about Indian manufacturers “dumping” cheap products abroad.

The prospect of an Indian metals giant venturing overseas conjures memories of the ill-fated acquisition of Corus, the Anglo-Dutch group, by Tata Steel, which is now being offloaded into a joint venture with Thyssenkrupp of Germany. But this deal is much smaller, relative to the buyer, which makes it less risky for Hindalco. And Birla is an experienced dealmaker too: the mooted acquiring unit, Novelis, was itself was acquired by the tycoon in 2007 for around $6 billion.

At about 12 times trailing EBITDA, Aleris would be expensive relative to Hindalco’s own 8.5 times. It is always risky to pay a high multiple in cyclical industries such as metals. But the Indian magnate is apparently betting on increased demand for strong, lightweight aluminium amid the uptake of electric vehicles, which tend to use more of this metal, and tougher rules on fuel emissions, which should drive increased usage in traditional cars too.

That looks smart. Ducker Worldwide reckons the use of aluminium in cars will increase by up to 30 percent by 2025. And brokerage Kotak reckons automotive sheet demand in North America will probably result in a supply deficit for rolled products, a form of aluminium used in car-making. That, in turn, will help producers charge more. If so, the original price tag would look more lightweight too.

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CONTEXT NEWS

- India’s Hindalco has submitted a $2.5 billion bid for aluminium producer Aleris, Bloomberg reported on Jan. 4, citing people with knowledge of the matter.

- Mumbai-listed Hindalco made a non-binding offer through its privately held U.S. unit, Novelis, the sources added.

- Ohio-based Aleris is owned by Oaktree Capital and Apollo Global Management. Aleris had earlier agreed to sell itself to Zhongwang USA for an enterprise value of $2.3 billion. That deal was scrapped after U.S. officials raised national security concerns about the Chinese-backed bidder.

- Hindalco has a market capitalisation of $9.8 billion.

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Editing by Quentin Webb and Katrina Hamlin

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