Indian Conglomerate Buys Novelis

Includes: AL (defunct), CSD, NVL
by: Andrew Corn

Part of the investment thesis of spin-off stocks is how well independent management can singularly focus on the future of the firm. With the core business now being the exclusive priority and management payout better aligned with stockholders, a winning formula is in the making.

One of the higher performing stocks in our Clear Spin-Off Index licensed for the Claymore/Clear Spin-Off ETF (AMEX:CSD) is the Canadian Aluminum producer, Novelis Inc. (NVL). A mid cap company with a current market capitalization of about $3.3 billion and annual revenues approaching $10 billion, the company was spun off from the Montreal based Alcan Inc. (AL (defunct)) in January 2005.

The company's shares are traded on both the Toronto and New York Stock Exchanges under the symbol NVL.

Since its IPO, using an industry-leading technology developed over ninety years, Novelis currently produces almost 20% of the world's flat rolled aluminum. The spin-off has significantly benefited from its predecessor's rich history in the aluminum marketplace with a client base of major brands such as Anheuser-Busch (NYSE:BUD), Ball (NYSE:BLL), Coca-Cola (NYSE:KO), Crown Cork & Seal (NYSE:CCK), Ford (NYSE:F), General Motors (NYSE:GM) and Kodak (EK).

This solid foundation of recurring revenue has boosted the firm to a number one ranking in production of rolled aluminum in Europe, South America and Asia and a number two ranking in North America. At the intersection of environmentalism and good business, Novelis is also the world leader in the recycling of used aluminum beverage cans recycling more than 35 billion used beverage cans annually.

Despite inconsistent fundamentals such as a positive year over year quarterly revenue growth of 22% but a negative -1.43% trailing twelve month operating margin, the stock has performed extremely well this year. With a stock price hovering between $25-$30 most of last year and through the first month of this year, the price has surged significantly to a $40-$45 range since February.

The reason for this dramatic upsurge was not because of the release of stellar earnings nor analyst upgrades, but because of the announcement that Novelis had agreed to be acquired. On February 11, Hindalco Industries Ltd., India's largest non-ferrous metals producer and the flagship company of the Aditya Birla Group, a $20 billion multinational conglomerate, and Novelis announced that it had agreed with Hindalco to a buyout of Novelis shares in an all-cash transaction valued at approximately $6.0 billion, including approximately $2.4 billion of debt.

Under the terms of the agreement, Novelis shareholders would receive $44.93 in cash for each outstanding common share. It said that the transaction was expected to close sometime in the second quarter of this year once all the regulatory approvals have been completed.

Like sharks smelling blood, arbitrageurs pounced at this opportunity raising the price of the anticipated buyout price. Trading activity picked up even before the announcement as speculation of such a takeover permeated the securities markets.

The buyout offer represented a 17% premium to the previous trading day's closing price and almost a 50% premium to the share price on Jan. 25, the day before Novelis said it was negotiating with potential buyers. By the end of the day of the announcement, the stock price closed up 13.3% to $43.67 and has continued to trade in this vicinity.

Of course, if the deal does not go through, the stock price will probably return to 2006 levels. However, if the deal does go through, another spin-off stock will replace it in the Clear Spin-Off Index after providing the index with a hefty return.

Disclosure: Novelis, Inc. [NVL] is a constituent in the Clear Spin-Off index licensed for the Claymore/Clear Spin-Off ETF [AMEX:CSD]. Mr. Corn is CEO and founder of Clear Indexes LLC which publishes the index and he owns shares of the ETF. He does not directly own shares in NVL.

NVL 1-yr chart

NVL 1-yr chart