Hindalco Industries - Buyout of minority stake in Korean operations - Edelweiss

Novelis has announced the acquisition of 31.2% stake in its Korean subsidiary, taking (Novelis) ownership to practically 100% (current ownership at 68%). The company would pay USD350mn in cash, giving it an equity valuation of USD1.1bn. The transaction is expected to be closed by December 31, 2011.

Effective valuation looks fair, but not cheap

We estimate the FY11 EBITDA of Korean business at USD220mn. Novelis Korea has been debt free since October 2010. While we do not have the outstanding cash figure, we estimate it at USD100mn based on one-year cash accruals. Novelis' consolidated cash is USD286mn as on September 30, 2011. Considering the ongoing capex and the challenging market conditions, the company may not want to draw down this cash. If we assume it to raise the transaction amount entirely from debt and assume the outstanding cash at USD100mn for the Korean arm, the effective EV/EBITDA works out to be 6.3x.

Impact on FY13 PAT marginally positive

We estimate the FY13 consolidated PAT/ EPS to be positively impacted by ~1% after considering the increased debt and corresponding interest.

Total control to be a long term positive

The key drivers of the transaction are the need for providing an exit to minority shareholders (mainly Taihan Electric Wire Co. Ltd.) and obtaining full control for Novelis. Total control over the Korean arm provides Novelis with the entire upside from its proposed capacity expansion of 350kt in Korea. This expansion can generate an incremental EBITDA of ~USD150mn in FY15, provided that the current Asian business EBITDA/t is maintained and some benefits accrue from its proposed recycling. Besides the existing EBITDA of USD220mn, Novelis would enjoy the full impact of this incremental EBITDA from FY15 onwards.

Source : Equity Bulls

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