Although the aluminum industry is facing a tough time during the COVID-19 pandemic, there is still light at the end of the tunnel with the Hindalco-Novelis acquisition of Aleris, which makes the group the largest producer of FRP globally.
In the aluminum industry, Novelis Inc is one of the largest flat-rolled product (FRP) producers globally. Hindalco Industries Limited acquired Novelis in 2007, which was one of the largest acquisitions in corporate India’s history. Novelis predominantly focuses on the can sheet business (60%) followed by automotive (20%), with the rest being the specialty segment.
In July 2018, Hindalco-Novelis and Aleris signed a definitive agreement of $2.58 billion, with the deal expected to be closed before the end of 2019. Before the $2.8 billion deal (higher than earlier estimates) was inked, the acquisition was delayed as Novelis was awaiting regulatory clearances from the USA, EU, and China.
The current global demand for FRP stands at approximately 29 million tons (including China). The three FRP entities within the Aditya Birla group (Hindalco, Novelis, and Aleris) now have a combined 15% share of the total global market, with an estimated value-added capacity of over 4.7 million tons.
Overview of Aleris Corporation
Aleris is a global supplier headquartered in Cleveland, Ohio. It focuses mainly on aerospace, automotive, and specialty products (marine and electronics), with shipments of about 860 KTPA (kilo tons per annum) and revenue of over $3 billion. It has 13 factories spread across three continents. Aleris has completed its investment cycle phase and plants have started commercial production for their new or expanded facilities:
- Auto body sheet in North America: Investment of $425 million in Lewisport, Ky., multi-year long-term contracts, and commercial shipments have started.
- Auto body sheet in EU: Investment of $85 million in Duffel, Belgium, long-term contracts with auto OEMs.
- Aerospace: Investment of $350 million in Zhenjiang, China, long-term contracts with OEMs, pre-qualification in place for Western clients. Aleris is a pre-qualified supplier of high-quality niche aluminum alloys to aerospace giants Boeing, Airbus, and Bombardier.
Synergies for Growth Prospects for Novelis-Hindalco
- Access to Global Aerospace Clients: Hindalco-Novelis has access to the niche aerospace market with technological capabilities in manufacturing and research and development in the Aleris facility in Koblenz, Germany. It enhances its value-addition growth prospects to further strengthen its presence among blue-chip clients such as Airbus, Boeing, Bombardier, Denso, Dana, Comac, etc., with which Aleris has secured long-term contracts.
- China Auto Sheet Business: Aleris also has operations in Asia, which will be a consolidated entity. This strengthens the ability to serve the automotive demand, especially for auto sheets, at a higher scale in China. Aleris commissioned the Zhenjiang facility, situated close to the Hindalco-Novelis facility in Changzhou, and announced the decision to double its capacity to 200 KT (kilo tons) per year.
- Consolidating its Position in the US Market: Hindalco-Novelis-Aleris can further strengthen its presence in the FRP segment with a cost-effective and streamlined business and access to a larger customer base. In the specialty electronics segment, Aleris has plants in Lincolnshire, Ill., Lewisport, Ky., Uhrichsville, Ohio, and Clayton, N.J., which Hindalco-Novelis will now have access to, making it the largest producer of FRP electronics in North America. This will ensure that Novelis-Aleris is a strong competitor alongside Arconic (Alcoa).
- Heat Exchanger Segment in Europe: This is a crucial segment for Aleris as it is linked closely to the automotive sector and will strengthen Hindalco-Novelis-Aleris’ footprint across Europe.
- Marine Plates Business (Specialty): Hindalco-Novelis can capitalize on its marine plates business, which currently focuses on North America and has applications in cruise ships, boats, LNG carriers, etc. Novelis gained access to the European customer base with Aleris plants in Belgium (Duffel) and Germany (Koblenz).
- Increase in Market Share in EU Region for Electronics (Specialty): Hindalco-Novelis operates out of the US and Brazil in the FRP electronics segments in applications such as PCB, enclosures, capacitors, battery casings, computers, etc. Now, it can further increase its presence in the EU region as Aleris has a base in Duffel, Belgium, with access to large-scale contract manufacturers such as Asteelflash, Jabil Circuit, Kemet, Neways Electronics, Vishay, Zollner Electronik, etc.
Why this is a Win-Win Deal for Both Parties:
- Aleris, with over 1 million tons of shipments, will boost the presence for Novelis-Hindalco in specialty segments such as aerospace, electronics, marine and automotive in the volumes-driven segment.
- Beyond its many strategic benefits across the regions, the acquisition will generate approximately $150 million in synergies and create a strong, sustainable financial profile.
- Due to the COVID-19 pandemic, the aerospace segment, which will be the largest beneficiary of this acquisition, has shown a negative outlook for the next two quarters of 2020. A return to normalcy will not only fulfill all the orders but also ensure the entire ecosystem functions smoothly.
- Aleris is poised for transformational growth, which means its pre-invested equipment before the acquisition will start returning top-line and bottom-line revenues, which will benefit the entire group.
- Hindalco-Novelis and Aleris, as one entity, will have easy access to and flexibility for metal procurement. Scrap synergies will be a key benefit, followed by operational efficiencies and supply chain benefits, which shall ensure sustained cost savings and an increase in earnings before interest, taxes, and amortization (EBITA) margins for sustainable growth.
- Hindalco-Novelis-Aleris as an entity will boost aluminum’s chances as a replacement for steel by gaining a greater platform for production.
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