MUMBAI (Commodity Online): Aditya Birla group’s Novelis, a Canadian firm the company bought in 2007 for around $6 billion, staged a turnaround in the September quarter to post a net profit of $195 million.

Shares of Hindalco — Novelis was acquired by the Birla flagship — had fallen by 14% on February 12, 2007, the day the deal was announced.

As the turnaround was achieved on the back of strong sales in Asia and South America, the company’s earnings that will be boosted by tough cost-cutting measures and the closure of loss-making supply contracts can only improve with the US economy riding out of recession with a 3.5% growth in gross domestic product.

In the September quarter, the Ebitda went up to $200 million from $124 million in the previous quarter and $89 million last year.

In 2007, when the group was trying to close the deal, the viability of acquiring a downstream company at a time when the whole world was going upstream was questioned.

Novelis had a can price sealing contract with Pepsi and Coke that restricted the company from selling can stock metal used in beverage cans at a price not higher than the corresponding price on the London Metal Exchange. So when the price of aluminium surged by more than 60% in the subsequent period, Novelis was buying at a higher price and selling its products to Pepsi and Coke at a lower price.

The can contracts will expire on December 31, 2009.
In 2008, Hindalco took a $982 million foreign currency loan at Libor plus 315 basis points to pay back a $3.03 billion bridge loan it had taken a year back at Libor plus 80 basis points to fund the deal.

The feat by Novelis is commendable considering the fact that cross-border acquisitions by Indian companies have run into hurdles mainly due to issues relating to integration and developing synergies. Most of their issues on synergy between the Indian company and the foreign company have been market related.

The impact of the economic slowdown led to a fall in revenue growth at Corus, the Anglo-Dutch steelmaker acquired by Tata Steel in 2007 for $13 billion. Corus was forced to shut some of its mills and cut staff due to a slowdown in demand. Tata Group’s another high profile acquisition, UK-based carmaker Jaguar and Land Rover, is also facing synergy issues.

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