Novelis Corp. has secured final approval from the European Commission for the sale of Aleris Corp.'s aluminium production plant in Duffel, Belgium, to the Liberty House Group, the company said in its website.
The move sets the stage for the $2.6-billion takeover of Aleris—a global supplier of rolled aluminium—by Novelis, the U.S.-based downstream subsidiary of billionaire Kumar Mangalam Birla's Hindalco Industries Ltd.
The European Union had earlier objected to the Novelis-Aleris deal on fears that it could reduce choice for consumers and increase prices. The commission, however, later held that the acquisition could proceed if Novelis divested Aleris' plant in Duffel to a third party approved by it.
The Liberty House Group intends to acquire the Duffel facility for 310 million euros ($337 million). The facility has a capacity of 200 kilo tonnes, of which 100 KT finds use for automotive lines and the remainder is for construction, distribution, commercial transportation, among other industries.
The facility has an operating profit of $50 million—implying a deal Ebitda of 6.6 times—which isn't very encouraging, according to Emkay Global, as the residual business of non-autobody sheet business also implies a similar multiple despite being low on profit and being more cyclical than automotive business.
The brokerage suggested that the valuation is expensive, given that it expects aluminium demand to remain weak due to the Covid-19 impact.
Separately, the original transaction also hinges on the divestment of Aleris' facility in Lewisport, which could face delays on the back of the global outbreak of the novel coronavirus. Novelis is seeking an extension of 9-12 months to complete the transaction.
The divestment value at €310 million implies a trailing EV/Ebitda of about 7 times, which is a positive surprise, Pinakin Parekh, analyst at JP Morgan, wrote in a report after the deal announcement.
Parekh cut his target price on Hindalco to Rs 170 from Rs 195 factoring in sharp volume and margin cuts at Novelis driving down earnings per share by about a third. An attractive divestment value of the Duffel plant increases the possibility that Novelis should be able to get an attractive value for the much larger Lewisport facility, further reducing the acquisition value for Aleris, he said.
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