A REPORT ON

MOTIVES OF MERGER
FOR
L&T Finance acquisition of Fidelity India
Hindalco Industries Ltd. Acquisition of Novelis Inc. (outbound)

Submitted by:
PGDM 2nd Year, Section ABC:
Mukul Walia -20121i73

Submitted to:
Prof. SHIV NATH SINHA

Outbound Hindalco: The Novelis Acquisition

Background of the Acquirer Company (Hindalco)

Hindalco Industries Limited, the Mumbai based flagship company of the Aditya Birla Group,
was structured into two strategic businesses- aluminium and Copper. Established in 1958,
Hindalco commissioned its aluminium facility at Renukoot in the Indian state of Uttar
Pradesh in 1962. It had grown to become the country's largest integrated producer of
Aluminum and ranked in the top quartile of low cost producers in the world. Hindalcos stock
was traded on the Bombay Stock Exchange, the National Stock Exchange of India Limited
and the Luxembourg Stock Exchange. A key aspect of Hindalco's strategy was continuous
growth. The Company had taken two major initiatives in this direction in the recent past. In
1999, the company acquired a 74.6 percent controlling stake in Indian Aluminum Co. Ltd.
(INDIAL), a leader in the alumina and semi-fabricated business. The second of the initiatives
was a brown-field expansion of facilities at a cost of Rs. 18billion. The expansion added
100,000 TPA to smelting capacity along with a 210,000 TPA increase in Alumina Refining
Capacity and matching augmentation of power generation capacity.
It enjoyed a domestic market share of 42 percent in primary Aluminum, 63 percent in rolled
products, 20 percent in extrusions, 44 percent in foils and 31 percent in wheels. Hindalco had
launched several brands like Aura for alloy wheels, Freshwrapp for kitchen foil and Ever Last
for roofing sheets in the recent years. The copper plant produced copper cathodes, continuous
cast copper rods and precious metals like gold, silver and platinum group metal mix.
Sulphuric Acid, Phosphoric Acid, Di-Ammonium Phosphate, other Phosphatic fertilisers and
Phospho-Gypsum were also produced at this plant. Hindalco Industries Limited owned a 51
percent shareholding in Aditya Birla Minerals, which had mining and exploration activities in

Australia.
The compa1ny has annual sales of US$14 billion and employs 19,975 people and is listed
on Forbes 2000. A metals powerhouse with a turnover of US$14 billion, Hindalco is one of
the world's largest aluminium rolling companies and one of the biggest producers of primary
aluminium in Asia. In June 2000, acquisition of controlling stake in Indian Aluminium
Company Limited (Indal) with 74.6 per cent equity holding.
In July 2007, Hindalco announced it is acquiring the stake of Alcan Inc.'s in the Utkal
Alumina Project located in Orissa.

Background of the Acquired Company (Novellis)

Novelis is the world leader in aluminium rolling, producing an estimated 19 percent of the
world's flat-rolled aluminium products. Novelis is the world leader in the recycling of
used aluminium beverage cans. The company recycles more than 35 billion used beverage
cans annually. The company is No. 1 rolled products producer in Europe, South America
and Asia, and the No. 2 producer in North America. With industry-leading assets and
technology, the company produces the highest-quality aluminium sheet and foil products
for customers in high -value markets including automotive, transportation, packaging,
construction and printing. Our customers include major brands such as Agfa -Gevaert,
Alcan, Anheuser-Busch, Ball, Coca-Cola, Crown Cork & Seal, Daching Holdings,
Ford, General Motors, Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull, Tetra Pak,
Thyssen Krupp and others. Novelis represents a unique combination of the new and the
5old. Novelis is a new company, formed in January 2005, with a new velocity, a new
philosophy and a new attitude. But Novelis is also a spin-off from Alcan and, as such,
draws on a rich 90-year history in the aluminium rolled product marketplace . Novelis has a
diversified product portfolio, which serves to the different set of industries vis--vis it
has a very strong geographical presences in four continents.
Novelis was always a problem child. It was born in early 2005 as a result of a forced spinoff from its parent, the $ 23.6-billion aluminium giant and Canada-based Alcan. In 2003,
Alcan won a hostile offer to wed French aluminium company Pechiney. But the marriage
1 http://www.moneycontrol.com/company-facts/hindalcoindustries/history
http://en.wikipedia.org/wiki/Hindalco_Industries
Hindalco: The Novelis Acquisition Case by Vishwanath S R

produced an unwanted child Novelis. Both Alcan and Pechiney had bauxite mines,
facilities to produce primary aluminium, and rolling mills to turn the raw metal into products
such as stock for Pepsi and Coke cans and automotive parts. But the US and European antitrust proceedings ruled that the rolled products business of either Alcan or Pechiney had to be
divested from the merged entity.
Alcan cast out its rolled products business to form Novelis. It is now the worlds leading
producer of aluminium-rolled products with a 19 per cent global market share. But in the
spin-off process, Novelis ended up inheriting a debt mountain of almost $2.9 billion on a
capital base of less than $500 million. That was just the beginning of its troubles. The
situation is worse now.
Though it marginally reduced debt, it made some losses too. On a net worth of $322 million,
Novelis has a debt of $2.33 billion (most of it high cost). Thats a debt-equity ratio of 7.23:1.
Soon, the unwanted child stumbled into another crisis. Novelis has a simple business model.
It buys primary aluminium, processes it into rolled products like stock for soft drink cans,
automotive parts, etc., and sells it to customers such as Coke and Ford. But the management
took a wrong call on aluminium prices. In a bid to win more business from soft drink
manufacturers, it promised four customers not to increase product prices even if raw material
aluminium prices went up beyond a point. A few months after Novelis signed those contracts,
aluminium prices shot up 39 per cent (between 30 September 2005 and 2006). To these four
customers, Novelis was forced to sell its products at prices that were lower than raw material
costs. These four account for 20 per cent of Noveliss $9-billion revenues. But the
managements wrong judgement led to losses of $350 million (in 2006).
More recent expansions were made through both acquisitions and modernization of existing
mills, which increased Alcans can stock, sheet and foil rolling capabilities. Novelis was spun
off to carry on most of the aluminium rolled products businesses operated by Alcan with an
approach to business that is more focused on helping our customers perform and on
transforming new ideas into practical product solutions.
Novelis inherited its assets, know-how and structure from Alcan. In 1902, the Canadian
subsidiary of the Pittsburgh Reduction Company (later re-named Alcoa) was first chartered as
the Northern aluminium Company, Limited. When Alcoa divested most of its interests
outside the United States in 1928, Alcan was formed as a separate company from Alcoa to
assume control of most of these interests. In the following years Alcan expanded globally,
building or acquiring hydroelectric power, smelting, packaging and fabricated product
facilities run by approximately 88,000 employees in 63 countries.

The company had 36 operating facilities in 11 countries as of December 31, 2005. The tables
below present Net sales and Long-lived assets by geographical area (in millions). Net sales
are attributed to geographical areas based on the origin of the sale. Long-lived assets are
attributed to geographical areas based on asset location. In 2005, 2004 and 2003, 40%, 41%
and 39%, respectively, of our total Net sales were to our ten largest customers.

Rationale of the Merger

From the Point of View of Acquirer (Hindalco)
This acquisition was a very good strategic move from Hindalco. Hindalco will be able to ship
primary aluminium from India and make value-added products. The combination of Hindalco
and Novelis establishes an integrated producer with low-cost alumina and aluminium
facilities combined with high-end rolling capabilities and a global footprint. Hindalcos
rationale for the acquisition is increasing scale of operation, entry into highend
downstream market and enhancing global presence. It has presence in 11 countries and
provides sheets and foils to automotive and transportation, beverage and food packaging,
construction and industrial, and printing markets. Hindalcos rationale for the acquisition is
increasing scale of operation, entry into highend downstream market and
enhancing global presence. Novelis is the global leader (in terms of volumes) in rolled
products with annual production capacity of 2.8 million tonnes and a market share of 19 per
cent. It has presence in 11 countries and provides sheets and foils to automotive and
transportation, beverage and food packaging, construction and industrial, and printing
markets. Acquiring Novelis will provide Aditya Birla Group's Hindalco with access to
customers such as General Motors Corp. and Coca-Cola Co. Indian companies, fueled by
accelerating domestic growth, are seeking acquisitions overseas to add production capacity
and find markets for their products. Tata Steel Ltd. spent US $12 billion last month to buy
U.K. steelmaker Corus Group Plc. Novelis has capacity to produce 3 million tonne of flatrolled products, while Hindalco has 220,000 tonne.
This acquisition gives Hindalco access to higher-end products but also to superior
technology,'' Hindalco plans to triple aluminium output to 1.5 million metric tonne by 2012 to
become one of the world's five largest producers. The company has interests in
telecommunications, cement, metals, textiles and financial services. After the deal was signed

for the acquisition of Novelis, Hindalco's management issued press releases claiming that the
acquisition would further internationalize its operations and increase the company's global
presence. By acquiring Novelis, Hindalco aimed to achieve its long-held ambition of
becoming the world's leading producer of aluminium flat rolled products. Hindalco
had developed long-term strategies for expanding its operations globally and this acquisition
was a part of it. Novelis was the leader in producing rolled products in the Asia-Pacific,
Europe, and South America and was the second largest company in North America in
aluminium recycling, metal solidification and in rolling technologies worldwide. The benefits
from this acquisition can be discussed under the following points:
Post acquisitions, the company will get a strong global footprint.
After full integration, the joint entity will become insulated from the fluctuation of
LME Aluminium prices.
The deal will give Hindalco a strong presence in recycling of aluminium business.
As per aluminium characteristic, aluminium is infinitely recyclable and recycling it
requires only 5% of the energy needed to produce primary aluminium.
Novelis has a very strong technology for value added products and its latest
technology Novelis Fusion is very unique one.
It would have taken a minimum 8-10 years to Hindalco for building these facilities,
if Hindalco takes organically route.
As per company details, the replacement value of the Novelis is US $12 billion,
so considering the time required and replacement value; the deal is worth
for Hindalco. The current revenue of hindalco is very much dependent on the aluminium
prices and when the prices are high they make a larger margin, this not the case with rolling
business which usually has a constant margin. For Hindalco to develop such technology
will take a lot of time. According to Standard and Poors it would take 10 years and $ 12
billion to build the 29 plants that Novelis has with capacity of close to 3 million tonnes. The
takeover of Novelis provides Hindalco with access to the leading downstream aluminium
player in western markets. The purchase structurally shifts Hindalco from an upstream
aluminium producer to a downstream producer.
This is reflected in Novelis downstream product capacity of 3.0 mt compared to Hindalcos
existing primary capacity of 500 kt. Even with Hindalcos expansion plans to take primary
production to 1.5 mt by 2011, the group will remain a downstream aluminium producer.
Novelis shareholders are required to approve the deal which h the companies expect to be
completed by 2007.

From the Point of View of Acquirer (Novalis)

Novelis being market leader in the rolling business has invested heavily in developing
various production technologies. One of such technology is a fusion technology that increases
the formability of aluminium. This means that it can be better used formed into the design
requirement by the car companies. All raw aluminium is processed so that it can be used in
products. Fourty percent of the products are rolled products and Novelis is in leader in rolling
business with a market share of 20%. Any change in the raw material price is directly passed
on to the customers who range from coca cola to automobile companies like aston martin.
So to dominate the aluminium prices Novaliss acquisition by Hindalco was good for
Novalis as well. Novalis got to expand its operations to many developing countries like
India without facing pain of expansion.
For various reasons Novalis wasnt performing any good in comparison to our firms in the
industry for the following reasons: Novelis inherited huge debt and couldnt pay back.
Financial losses
High debt equity ratio of 7.23:1
Chaos in financial reporting
Loss of credibility
Constant restructuring
Search for CEO

The Merger Deal and the Motivations

The Merger Deal:Style: Friendly
Intention: Opportunistic

Purpose: Defensive
Predictability of Value: Calculative
Strategic Mode: Development and Expansion.
Number of shares (m)

74.7

Price per share ($)

44.93

EV

6216million$

Debt

2860 million$

Equity value

3356 million$

Under the terms of the agreement, Novelis shareholders would receive $44.93 in cash for each
outstanding common share at a 15 percent premium to the market price. AV Metals the A V
Birla group's Canada-based special purpose vehicle (SPV) - would infuse $3.5 billion to finance
Hindalco's proposed acquisition. Putting aside the $2.4 billion debt burden of Novelis, the cash
component for financing the deal stood at $3.5 billion. Of this amount, AV Metals would take
loans worth $2.8 billion from three financial institutions, namely UBS, ABN AMRO and Bank of
America. This included a bridge loan of $1.4 billion at a coupon rate of 7.2 percent. Novelis
already carried $2.4 billion of debt comprising of $1 billion term loans and $1.4 billion high-yield
loans.

Motivations for both the companies:

Dominate the aluminium prices.

Improved operations.
Improved Market Share.
Expanding its wings.
Perfect Synergy.
The Fusion Technology.
Forward Integration

Impacts of the Merger on the Enlarged Entity

Expand its operations

Leverageable into becoming a globally strong entity.
Increase in sales and profit.
Increased Market Share.
Reduction in debt equity ratio.
Good value for share holders
Increase in credibility.

PAT
5000
4000
3000
2000
1000
0
Mar '09

years
PAT

Mar '10

Mar '09
348.83

Mar '10
2,879.35

Mar '11

Mar '11
3,558.70

Mar '12
4,351.85

Mar '12

L&T Finance acquisition of Fidelity India

Background of the Acquirer Company (L&T Finance acquisition)

L&T

Finance Company Limited (L&T Infra) is promoted by the engineering and

construction conglomerate Larsen & Toubro Limited (L&T) and L&T Finance Holdings
Limited (a subsidiary of L&T). It was originally incorporated as L&T Capital Holdings
Limited on May 1, 2008 under the Companies Act, as a public limited company, to carry
on the business of investment/finance. Our Company received the certificate of
commencement of business on May 15, 2008. Our Company subsequently changed the
name of our Company to L&T Finance Holdings Limited pursuant to a special resolution
passed by the shareholders at a general meeting dated September 1, 2010. Pursuant to
the change of name, a fresh certificate of incorporation was granted to our Company
by the RoC on September 6, 2010. It was set up with an initial capital of Rs. 500 crore and
has expanded at a rapid rate since inception to reach an asset base of Rs.152 bn. L&T
Finance provides a wide range of customized debt & equity products as well as Financial

Advisory Services for the development of infrastructure facilities in the country with a focus
on power, roads, telecom, oil & gas and port sectors. It is primarily engaged in short to
medium term asset backed financing viz. construction equipment finance, transportation
equipment finance, rural products finance, supply chain finance, corporate loans and leases,
microfinance, etc.
Background of the Acquired Company (Fidelity)
Fidelity Worldwide's India asset management arm, which was launched in 2004, managed
assets worth about 88 billion rupees as of end-December, data from the Association of Mutual
Funds in India showed. As per the assets under management, it was the 15th largest company
in India's 44-player asset management industry.

Assets managed by fund managers in India rose to 5.9 trillion rupees as of March 2011 from
2.3 trillion in March 2006, a study by research and Consultancy Company
PricewaterhouseCoopers showed.2

Rationale of the Merger

From the Point of View of Acquirer (L&T Finance)
Fidelity AMC has established itself in this space as one of the leading Asset Management
Companies; with most of their schemes having performed well compared to their peers. This
acquisition will catapult L&T Mutual Fund into the big league of Indian asset managers.
L&T is a well-known, trusted and respected brand in our country. But it has recently shifted
its focus on the financial services industry and is a relatively new player in this area
compared to Fidelity. So L&T Finance will get help and support from Fidelity.
Over the last two years the equity funds of Fidelity India were at their peak form due to the
hard work put in by the likes of Sandeep Kothari and other members in his team who were
managing the equity portfolio of Fidelity MF.
Training programs will be available by Fidelity Research Directors to the L&T fund
managers and analysts as a part of knowledge transfer for the period of transition
From the Point of View of Acquired (Fidelity)
As growing competition, weaker markets and regulatory changes take a toll on the sector's
profitability. The sharp fall in the Indian equity markets last year and the recent regulatory
changes such as the removal of the entry load, or a commission charged by a mutual fund
distributor for selling a product, have added to the competitive pressure. Fidelitys
accumulated losses, which has clearly made them to exit.
A source at Fidelity confirmed that L&T Finance holdings were not the highest bidder for the
business. The continuity of management turned the deal in favour of L&T Finance. The
2 https://www.fidelity.com/india http://articles.economictimes.indiatimes.com/2012-0327/news
http://www.moneycontrol.com/company-facts/fidelityfinance/management
http://www.hindustantimes.com/

equity fund managers at Fidelity will manage the funds as long as they are needed through
the transition.

The Merger Deal and the Motivations

The Merger Deal

Fidelity Asset Management Company has been recently acquired by L&T Mutual
Fund. As a result, a few schemes of Fidelity MF are all set to merge with L&T MF

effective 16th November 2012.

Industry sources said L&T has paid about Rs 530-550 crore to buy Fidelity, valuing
the deal at 6.2% of Fidelity's total assets under management of Rs 8,881 crore as on

December 31.
L&T, which entered the mutual fund industry in September 2009 by buying DBS
Cholamandalam Asset Management, had assets worth Rs 4,616 crore as on December

31.
L&T mutual fund with assets worth Rs 4,600 crore acquired the Rs 8,800 crore-

Fidelity MF.
L&T Finance has agreed to buy Fidelity Worldwide Investment's Indian mutual fund
business, becoming the 10th-biggest equity fund house in a highly fragmented and

competitive market marked by wafer-thin profitability.

The financial services arm of construction major Larsen & Toubro pipped rivals,

including HDFC Asset Management and Pramerica, to purchase FIL.

The deal will immediately boost L&T's assets to Rs 13,500 crore, making it the

13thbiggest fund and the 10th-largest on the basis of equity.

A large part of the L&T Finance business is lending. This is part of the move to

increase fee-based income which is a steady business over mid-to-long term.

Shares of L&T Finance rose 4.6% to close at Rs 49.80 on Tuesday after a late spurt.
"It will be a turning point for L&T Mutual Fund and sad for the mutual fund industry,

because a good fund house has decided to walk out of the country.
The following are the schemes to be merged Fidelity Flexi Gilt Fund with L&T Gilt Fund
Fidelity Wealth Builder Fund-Plan A with L&T Monthly Income PlanFidelity

Wealth Builder Fund-Plan B & Plan C with L&T MIP Wealth Builder FundL&T
Contra Fund and Fidelity India Value Fund to form L&T India value Fund
Fidelity India Growth Fund to form L&T India large Cap Fund

Motivations for both the companies

There have been several acquisitions of Indian mutual funds with valuations ranging from
1.6% to 13% of AUM.
The deal will immediately boost L&T's assets to Rs 13,500 crore, making it the 13thbiggest
fund and the 10th-largest on the basis of equity.
Increase in sales and profit and Market Share.

Impacts of the Merger on the Enlarged Entity

Pursuant to the acquisition of Fidelity's Indian mutual fund business by L&T Finance Limited
(LTF), a subsidiary of L&T Finance Holdings Limited (LTFH). The names of schemes are
changed as follows:
Old Name of the Scheme
Fidelity Equity Fund
Fidelity Tax Advantage Fund
Fidelity India Special Situations Fund
Fidelity International Opportunities Fund
Fidelity Flexi Bond Fund
Fidelity Ultra Short Term Debt Fund *
Fidelity Fixed Maturity Plan Series VI

New Name of the Scheme

L&T Equity Fund
L&T Tax Advantage Fund
L&T India Special Situations Fund
L&T Indo Asia Fund
L&T Flexi Bond Fund
L&T Low Duration Fund
L&T Fixed Maturity Plan Series VI

(comprising of six plans (Plan A to F),

having separate portfolios
Fidelity Short Term Income Fund
Fidelity Cash Fund
Fidelity Global Real Assets Fund
Fidelity India Prudence Fund ***
Fidelity India Equity and Gold Fund ****

L&T Short Term Income Fund

L&T Cash Fund
L&T Global Real Assets Fund
L&T India Prudence Fund
L&T India Equity and Gold Fund

Upon completion of the proposed transaction certain schemes of Fidelity Mutual Fund will be
merged with certain schemes of L&T Mutual Fund. Consequently, the transferee schemes
will be the surviving schemes as listed below:
Transferor Schemes
Fidelity Flexi Gild Fund
Fidelity Wealth Builder Fund Plan A
Fidelity Wealth Builder Fund Plan B
Fidelity Wealth Builder Fund Plan C

Transferee / Surviving Schemes

L&T Gilt Fund
L&T Monthly Income Plan
L&T MIP Wealth Builder Fund
L&T MIP Wealth Builder Fund

Hike in recurring expense ratio:- With effect from November 16, this international fund will
have a recurring expense of upto 2.5 per cent as against 0.75 per cent earlier. It is noteworthy
that this fund was investing in Fidelitys own global fund (feeder route). Now with the two
management being different, the investment management and advisory fees is hiked from
0.05 per cent to 0.75 per cent. This is the primary reason for the increase in expense. This will
result in more charges on your NAV.
With an excellent blend of equity and debt assets, combined with a great brand in L&T and a
complementary distribution network, this provides a great platform for L&T Mutual Fund to
potentially attain market leadership.
Mar '09
391.17

years
PAT

Mar '10
454.8

Mar '11
729.19

PAT
800
700
600
500
400
300
200
100
0
Mar '09

Mar '10

Mar '11

i http://www.theguardian.com/money http://www.valueresearchonline.com/
http://www.moneycontrol.com/company-facts/ltfinanceholdings