Corporate Front: M&A [Will Sterlite Beat the odds to Scoop up Indal?]

Only if it can offer an attractive revised price to the FI's, foot the bill, and shop for technology.

IAfter the initial flurry of punches, it is now time for the shadow boxing. With the first round of open offer, and counter-offer, by the challenger, the Rs 1,051-crore Sterlite Industries (Sterlite), and the defender, the Canada-based $7.78-billion Alcan Aluminium (Alcan), drawing to a close, the two contestants are now adopting a wait-and-watch strategy. Who'll wink first?

Last fortnight, a special committee, comprising three directors of Indal, headed by its 62-year-old chairman, S.M. Datta, recommended the rejection of Sterlite's offer for the acquisition of a 20 per cent stake in the company on the grounds that it would not benefit Indal's shareholders. Moreover, it claimed, Sterlite was in no position to bring in either managerial or technological inputs to benefit their business strategy.

Sterlite, for its part, is making every effort to lure the Financial Institutions (FIs), which may be willing to sell their 38.30 per cent stake in the Rs 1,155-crore Indian Aluminium Co. (Indal), with a revised offer price of Rs 120 per share--a 33 per cent jump over its initial offer of Rs 90.

Meanwhile, Alcan--which has a 34.60 per cent stake in Indal--has warned that it may have to adopt drastic steps if the FIs, and the other shareholders, bite the Sterlite bait. Threatens Suresh Thadhani, 58, vice-chairman and CFO, Alcan, which has made a counter-offer of Rs 105 per share: "If Sterlite acquires a significant stake, we will review our options, including technology support."

That leads to a question: will Sterlite's ceo, the 45-year-old Anil Agarwal, still be interested in his prey? For, technology--the preserve of global majors like the $13-billion Alcoa (US), and Alcan--is the deciding factor for success in the industry. Of course, Agarwal can follow the footsteps of the Rs 1,457-crore Hindalco, which has absorbed the technology it purchased from various sources.

Or Sterlite can seek a new foreign partner. The only problem: the other global majors may be unwilling to provide technology to a company in which Alcan continues to be a shareholder. That may not leave Agarwal with too many choices. Especially as his experience in the aluminium industry is limited to the takeover, and subsequent revival, of the ailing Rs 214-crore Madras Aluminium (MALCO) in 1995.

What's more, in case Alcan decides to sell its stake--which is unlikely although it might revise its India options--Agarwal may be forced to cough up a massive Rs 622.20 crore to buy the combined 72.90 per cent stake of the FIs and Alcan (at Rs 120 per share). Can Sterlite afford to invest such a huge amount? Not really.

Were Sterlite to fund the takeover from its internal accruals--its cash generation in 1996-97 was Rs 148 crore--it would have to exhaust almost its entire cumulative cash reserves of Rs 578 crore. And its existing debt-equity ratio at 1.12 doesn't leave much room for leverage. Moreover, Agarwal does not have any other cash cows to fund the takeover.

In fact, Sterlite's gross margins have fallen--from 18.88 per cent in 1994-95 to 13.93 per cent in 1996-97--due to its lower realisations from jelly-filled telecom cables (JFTCs) and continuous cast copper rods (CCRs). While the average price of JFTCs came down from Rs 893.69 per cable kilometre (CKM) in 1994-95 to Rs 860.47 per CKM in 1996-87, the price of CCRs dropped from Rs 1.52 lakh per tonne to Rs 1.32 lakh per tonne in the same period. The only reason why the company was able to show healthy net profits of Rs 126.92 crore in 1996-97 was a negligible interest burden and tax outgo of, respectively, Rs 55 lakh and Rs 1.13 crore.

Although these may not be reasons enough to stall Agarwal's aspirations, the Sterlite CEO had conceded in an exclusive interview with BT last fortnight that he was not "ambitious enough to quote a very high price for Indal's shares." Indeed, BT learns that Sterlite is not too keen to revise its offer. In that case, the FIs may sell a part of their stake to Alcan.

But will Alcan agree to increase its stake to 51 per cent, which will entail an investment of Rs 283.60 crore for an additional 18.60 per cent? Probably not, since Alcan's global priorities do not really include higher investments in its India operations. Its recent commitment to pick up a 20 per cent stake in Utkal Alumina-- which will implement a $1-billion 100 per cent export-oriented alumina project in Orissa--was, probably, to answer its critics, who allege that the Canadian major is not interested in Indal.

The loser in this predatory process is Indal, which is languishing in a lose-lose situation. Agarwal is interested in Indal, but has little experience; Alcan has the experience, but little interest in Indal. Indal's only other hope, probably, lies in finding a white knight in aluminium armour.

Why Alcan can't (spend in India)?

Nothing, it would appear, has gone right for Alcan in the 1990s. The Montreal-based aluminium major-- owning 11 bauxite mines, 12 alumina plants, and 13 smelters spread across 20 countries--is still reeling from the impact of the global recession in the early 1990s. As it strives to emerge as a more focussed organisation, its India operations--which contributed 3.05 per cent to Alcan's worldwide profits of $485 million in 1997--are not as important as those in the other emerging countries like Brazil and China.

Post-liberalisation, while many transnationals hiked their stakes to over 51 per cent in their Indian subsidiaries, Alcan was burdened with huge losses and declining turnover. Between 1989 and 1993, its turnover fell from $9.05 billion to $7.31 billion, and it incurred cumulative losses of $252 million in the three year period between 1991 and 1993.

Alcan's priority during the downturn was, thus, to cut costs. Between 1991 and 1994, its annual cost-base was reduced by over $600 million, which resulted in profits of $96 million in 1994. It then embarked on a three-year programme of divesting 45 non-strategic businesses in Canada, the US, the UK, Australia, and South America. And the resulting net proceeds of $1.25 billion were used mainly to repay Alcan's debt, which came down from $1.97 billion in 1995 to $1.50 billion in 1997.

Although Alcan's net profits went up from $263 million in 1995 to $485 million in 1997, it is still grappling with other problems. For instance, raw material costs are still 12-13 per cent above the world average, which is expected to fall further by 2005. And Indal's year-long study on the global aluminium outlook in 1992-93 concluded that "aluminium is a good business to be in provided a company is a real low-cost producer."

To achieve this, Alcan's future investments are geared to secure low-cost bauxite mines in Australia and Ghana, inexpensive smelters in Canada, British Columbia, and China, and the capacity expansion of value-added rolled products in Canada, Brazil, and Germany. That India is a mere blip on Alcan's radar is also indicated by the fact that, last October, CEO J. Bougie's presentation to analysts in New York mentioned neither Indal nor the proposed $1-billion alumina project, Utkal Alumina. Obviously, for Alcan, Indal's aluminium sheets are not hot enough to be rolled into megabucks.