Hindalco's acquisition of Canadian aluminium company Novelis has revealed another model of financing big-ticket buys.
The flagship metal company of the Aditya Birla Group used an innovative combination of leveraging the balance sheet of Hindalco, treasury loans from the company and the assets of Novelis to fund the deal.
The US $6 billion (Rs 27,000 crore) deal will be financed through a combination of recourse and non-recourse loans or debts. Of this, $ 2.4 billion (Rs 10,548 crore) would come from leveraging the property of Novelis while $ 3.1 billion (Rs 13,624 crore) would come as recourse debt from the Hindalco balance sheet.
Non-recourse debt is a type of loan that is secured by collateral, usually property. If the borrower defaults, the issuer can seize the collateral. However, the liability of the borrower ends with the collateral, even if the collateral does not cover the full value of the defaulted amount.
High capital expenditure, long loan periods and uncertain revenue streams characterise non-recourse loans, say investment banking sources.
Hindalco chairman Kumar Mangalam Birla has quelled speculation about the revenue stream of the Novelis deal, saying the business model itself has a fairly steady revenue stream.
The $ 3.1 billion recourse debt would come from leveraging the Hindalco balance sheet, which has a relatively low debt-to-equity ratio, said Debu Bhattacharya, MD, Hindalco.
Hindalco is also paying $ 44.93 (Rs 1,974.67) in cash per share to the shareholders of the Canadian aluminium major. On Sunday, the Novelis scrip touched a high of US $ 40.75 (Rs 1,790.96) before settling to US $ 38.47 (Rs 1,690.76).
Essel Mining, part of the parent company AV Birla Group, would provide $ 450 million. This is shown as a part of the treasury finance for the deal.
The strategy to pick up recourse and non-recourse loans is different from the usual private equity route. Speaking to Hindustan Times, a top Birla Group source said private equity money was not considered because the reason behind the acquisition is strategic, not financial.
“The acquisition makes sense for our balance sheet in the medium to long-term, so there is no immediate financial reason for the deal. That is the reason why this route was taken, and not any other,” the source said.