Aleris buy vindicates the risk Kumar Birla took on Novelis

Both acquisitions, announced within two weeks of each other in 2007, had uncanny similarities. While Corus, which was acquired on April 2, was five times bigger than Tata Steel, Novelis was three times the size of Hindalco Industries, which acquired the former on May 15.

The two acquisitions followed the same rationale - access to high end value added products with higher margins, better technology and a presence in developed markets.

Both of them – while Corus was a $12 billion buy, Novelis cost $6 billion – were followed by a free fall in the shares of Tata Steel and Hindalco. A day after the Corus acquisition, Tata Steel's share on BSE slumped 11 percent, and Hindalco's shares closed nearly 14 percent down on May 16.

More than 11 years later though, the fate of the two acquisitions couldn't have been more different.

While Tata Steel has stitched up a joint venture with Thyssenkrupp to save what remains of the erstwhile Corus in Europe, Hindalco Industries has used Novelis to make another multi-billion dollar acquisition and cement its place at the top of the world aluminium industry.

One person who has played a crucial role in both of Hindalco's acquisitions is Kumar Mangalam Birla, Chairman of the Aditya Birla Group.

Novelis turnaround

Birla had gone with his entrepreneurial gut to acquire Novelis, even going against the advice of his top manager. Novelis was a loss making enterprise, and the market thought that Birla was overpaying; Hindalco was paying $44.93 a share for a company that hadn't crossed the $30-mark for over a year.

Birla didn't have to wait for too long to get a vindication for the risk he took. Within three years, Novelis gave Hindalco an equity of $3 billion. The Canadian company's fortunes turned around dramatically after 2009, when its loss-making contracts for aluminium cans expired.

The Indian billionaire stepped in whenever needed, including when Novelis lost its top executive. Birla surprised everyone by picking a non-Indian. Novelis closed loss-making units, expanded capacity and improved its product portfolio. In 2007, just about 5 percent of the aluminium processed by Novelis was sold to the auto industry, a highly profitable market for the Canadian company. Today, the share has gone up to 20 percent.

The steps have borne fruit.

The value of Novelis today would be around $11-12 billion, Birla told reporters after announcing the Aleris deal on Thursday. Most importantly, Novelis is profitable. It reported a bottomline of $635 million on revenues of $11.5 billion in the 2018 financial year.

The Aleris bet

Like in the case of Novelis, Birla again showed patience and timed his offer perfectly to buy Aleris. The American company was courted by a Chinese company before the deal fell through and by the time Birla showed interest, Aleris shareholders were as keen as the Indian entrepreneur for a deal.

Interestingly, in 2007, Aleris was also thinking of acquiring Novelis.

Initial news of the Aleris buy was again welcomed with doubt, with the market selling Hindalco shares. But a day after the deal announcement on Thursday, Hindalco shares were up 3.58 percent even as this piece was being written.

The deal is structured in a way to insulate Hindalco from any debt burden. Novelis, now a profitable company, will debt-fund the acquisition.

"Aleris acquisition is a strategic fit and value accretive," said brokerage firm Motilal Oswal, a few hours after the deal was announced.

Aleris gives Hindalco, and thus Novelis, access to the highly lucrative aerospace clients, and increases its share in the auto market. More importantly, in these protectionism-filled days, Aleris brings manufacturing presence close to clients in Europe.

The deal will please Birla as it makes Hindalco the biggest player in the world when it comes to value added aluminium products. "The deal is part of our vision to make Hindalco a multinational, with focus on value-added products and be closer to key customers," Birla, told Moneycontrol.