Aluminium deal rumours heats up the markets

Shares of India’s largest aluminium producer, Hindalco Industries rose upto 10% during trading today. The scrip showed such movement after a long gap and it was not on account of any macro factors such as rise in Aluminum and Copper Prices on LME, or changes in duty structure but was brought about speculative newspaper report which states that Canada’s Alcan and Sterlite (subsidiary of London-based Vedanta Resources Plc) could launch a join bid for Hindalco to avoid hostile bid from Alcoa.

Alcan was recently in news after it received a hostile takeover bid from rival US based Alcoa Inc. for $27.6 billion to become the world’s largest aluminium producer. But the bid was rejected, citing low valuations. There were also rumours of Hindalco partnering with global mining giant BHP Billiton for a joint bid, while Sterlite and global miner Rio Tinto were heard to make another offer for Alcan. Some international media reports also cited that Norway’s Norsk Hydro ASA may make a competing bid.

But amidst all this, Alcan played a masterstroke by looking at acquisition of Hindalco. If it launches and aggressive takeover bid, it will make highly unattractive for other players. Hindalco has a market share of 45% and the shareholding pattern of the company is AV Birla Group owns 27%, while FIIs and foreign funds hold 37%, 10% in GDRs and rest preferential allotment to promoters which would take their stake to about 35%.

Given the diversified holding, above market results and strong metal prices, Hindalco would command a high premium to its existing share price. That’s why the scrip touched its 4-month high, when the stock fell nearly 14% after Hindalco agreed to buy Canada’s Novelis owing to higher debt levels of Novelis, resulting in earning dilution. Rupee depreciation is also a concerning factor for Hindalco.

Sterlite, owned by India-born Anil Agarwal, is expanding its aluminium capacity in India and wants become the No.1 aluminium player in the country (it is already the leader in zinc and lead through the divestment of PSU Hindustan Zinc). This may work against Hindalco, as it enjoys lower valuations than Sterlite.

If the deal goes through, it would be among the most high profile takeover of an Indian company. But acquiring a company of this size and stature would be very difficult, as Birlas are not known to be easy acquisition targets and have all the financial and strategic muscle and political clout to thwart such a move. The only scenario remains if Kumar Mangalam Birla wants to exit Hindalco, which is a wild dream.

But in this era of Corus, Novelis, RE Power, W&M, Flag Telecom, Thomson, Betapharma, Daewoo Trucks and Tetley, this certainly makes a reading with a different tide.