Mergers and Acquisitions

News Analysis (16th July to

22nd July)
How Ashok Leyland managed
to turn its loss-making
subsidiaries around
DATE: 18TH JULY, 2018.
SOURCE: BUSINESS STANDARD
 The company bought out Nissan’s stake in the light commercial
vehicle joint venture and turned the loss-making subsidiary around
within a year, riding on just two products. Then, it scripted a similar
story at Hinduja Foundries.

 It was a loss making company, today however Hinduja Foundries is

well on recovery turning EBITDA positive in 2017-18

 Ashok Leyland has announced a three-fold jump in standalone net

profit at Rs. 3.7 billion in the first quarter ended 30th June.

 Now it wants to merge the LCV business with itself.

 About the Deal
 Acquirer : Ashok Leyland

 Target : Ashok Leyland LCV

 Type of M&A : Horizontal Merger

 Remarks
Business Sense of Transaction
 Ashok Leyland believes that this move will help it to widen market
reach and product segments.
 While it continues to do well in domestic truck business, it is keen to
have a strong footing in other areas such as defence and after-
market to reduce it’s reliance on the truck business where demand is
cyclical in nature.
How opportunity arose:
 An overhaul of the LCV business strategy was undertaken after Nissan
exited the venture in 2016.
 In addition to launching a variant of it’s best selling truck Dost+, the
company also brought back Partner and MiTR which helped in
increasing sales.
 Ashok Leyland has just 3 products to take on 38 products of the
competitors in the market.
Justification for consideration:
 Ashok Leyland vehicles Ltd, reported a profit of Rs. 1.34 billion in
2017-18 against previous years’ loss of Rs. 24.9 million.
 Other subsidiaries from the Nissan partnership too are on the
growth path.
 Post acquisition the LCV business has been able to generate cash
and total debt in the LCV subsidiaries has reduced from Rs. 5.1
billion in March 2015 to Rs. 1.77 billion in March 2018.
 The goal of the company is to take the share of LCV business to 12-
14% from current 7% in 5 years.
 Ashok Leyland has set aside around Rs. 4 billion to introduce 5-6
new products and build a new platform for LCV business in next 12-
24 months.
 With investments into LCV business already amortised, analysts also
expect the merger to result in tax benefits.
Issues:
 Ashok Leyland may face short-term opposition because of the
foundry business.

 The merger of Hinduja foundries has impacted the company’s

EBITDA margin, which has reflected in its profit and loss account.

 The impact is expected to continue for another 4-5 quarters, till

the foundries business turns profitable.
Hindalco’s Novelis in talks to
acquire US based Aleris Corp
DATE: 20TH JULY, 2018.
SOURCE: BUSINESS STANDARD
 About the Deal
 Acquirer: Novelis, the U.S.-based downstream arm of India’s largest
aluminium producer, Hindalco Industries Ltd.

 Target: Aleris International Inc, the U.S.-based rolled aluminium

products maker.

 Type of M&A: Outbound (geographical) Acquisition

 Consideration: Novelis proposes to acquire Aleris Corp for an

estimated $2.5 billion.
 Objective of the transaction
1. Capacity Addition in no time:
 Aleris has recently commissioned its $425 million Automotive Body Sheet
(ABS) unit in Kentucky.
 An acquisition would add 1 million tonnes to Novelis’s 3.6 million tonnes
downstream capacity. The project would allow Novelis to add capacity
and save 3 years
2. Geographical Benefit:
 Increase Novelis’s presence in North America and Europe
3. Product Mix
Region Aleris Novelis
North America 51 35
Europe 46 30
Asia 3 18
South America 0 17
How did this opportunity come
about?
Availability of surplus cash due to:
 Sale of 50% stake in South Korean unit which will give $260 million
post tax
 Improved financials- due to better profitability due to better
product mix and operational efficiencies.
 Impact Analysis
 On 19th July, 2018, share price of Hindalco declined by 6.5% to close
at Rs. 198
 Acquisition will lead to consolidation in the aluminium sector in the US
 Hindalco’s debt to Ebitda stands at 2.8 times—given its consolidated
net debt of Rs 43,227 crore and Ebitda of Rs 15,025 crore as of March.
If it buys out Aleris for $2.5 billon, net debt will increase to Rs 59,020
crore for an Ebitda of 17,976 crore—including estimate of Rs 15,891
crore debt and Rs 2,084.6 crore Ebitda for 2019-20. That will take the
net debt to Ebitda to 3.3 times, in line with industry average of 3.

Parameter Pre-Deal Post-Deal

EBITDA (Rs. crore) 15025 17976
Net Debt (Rs. crore) 43227 59020
Net Debt to EBITDA 2.8 3.3
(Times)