Hindalco recovers half Novelis cost by making cash fungible

BS reported that four years after buying Novelis, a company 3 times its size, Hindalco is now banking on the Atlanta headquartered aluminum rolling and recycling major to fund its INR 23,000 crore expansion plan in India.

In one of the largest capital repatriations by an Indian company after a foreign acquisition, the Aditya Birla group flagship has initiated a program to financially integrate the two companies internally called Project Nalanda and make cash fungible.

The strategy allows Hindalco to tap cash trapped in Novelis that could not be accessed so far due to restrictive loan covenants. The money is essential to bridge the project equity for Hindalco’s CAPEX.

Mr Debu Bhattacharya MD of Hindalco said that the repatriation means Hindalco has recovered half the USD 3.5 billion it spent to buy Novelis. We own 100% of Novelis for just USD 1.8 billion. This return of capital represents almost 50% of the initial acquisition cost, achieved within 4 years of the buyout.

Hindalco acquired Novelis in 2007 for USD 6 billion by paying USD 3.5 billion in cash and taking on USD 2.5 billion of its debt including USD 1 billion in term loans and USD 1.4 billion in high yield bonds. But Hindalco did not raise debt on the Novelis balance sheet to fund the deal. It paid USD 3.1 billion through recourse financing on Hindalco’s own corporate guarantee and USD 450 million by liquidating treasury stocks.

Mr Sunirmal Talukdar CFO of Group CFO said that “We decided not to put any new debt on the Novelis balance sheet because recapitalization would have meant higher interest costs. Its bonds would then have been refinanced at 9% to 9.5%. Since Hindalco had a stronger balance sheet, it got a more aggressive pricing of Libor+30 for the first 12 months and Libor+80 for the next 6."

To replace an 18 month bridge loan of USD 3.03 billion for the acquisition, Hindalco raised USD 1.25 billion via a rights issue and another USD 1 billion from 12 global banks as term debt that was routed back via Dutch investment arm AV Minerals. The remaining amount came from Hindalco’s internal accruals.

It has been a slow and painstaking limp back to recovery for Novelis. The global financial meltdown resulted in the company posting a negative USD 104 million of free cash flows and an adjusted EBITDA of just USD 349 million in FY07. Liquidity support of USD 100 million was accompanied by several measures to slash costs and shut unproductive and expensive operations.

All this led to Novelis’ equity value more than doubling to around USD 8 billion in 2010. Its enterprise value of USD 12 billion was twice that in 2007. With Novelis finally standing on its own two feet with over USD 1 billion in adjusted EBITDA for the previous Q4, mid December 2010 saw Hindalco recapitalied Novelis with USD 4.8 billion in debt. This refinancing had USD 2.5 billion component of senior unsecured loans and USD 1.5 billion term loan with maturities of 7 years to 10 years. Another USD 800 million was a working capital loan.

Mr Talukdar said that with the stable earning profile, we were able to lever up Novelis at four times debt or EBITDA for a higher upfront return of capital for Hindalco.

Novelis bond holders and bankers also agreed to a net debt to EBITDA covenant of three times. This relaxation removed the restriction of capital deployment and actually made cash fungible between the two companies. Novelis could then repatriate USD 1.7 billion to the parent.

But it’s not just a one time windfall. As Novelis’ financials continue to improve, more remittances to Hindalco will be possible. From the capital returned, Hindalco is planning to repay the USD 1 billion debt taken to pay off the bridge loan and the rest will be used for upcoming expansion plans in India. It has an extra USD 700 million of seed capital for its Aditya alumina refinery and Jharkhand smelter projects.

（Sourced from Business Standard）