New Delhi: The promoters of Eicher Motors Ltd plan to buy back 13.12% of the company’s shares from the open market at more than double Friday’s closing price after Volvo AB, which will make trucks with Eicher, agreed to buy a minority stake in the Indian company at that premium, resulting in a sharp spike in the share price of the Indian vehicle maker.
Eicher Goodearth Investments Ltd, the promoter firm that owns shares in Eicher Motors, said Volvo agreed to pay Rs691.68 a share for an 8.1% stake in the company, even though Eicher’s shares closed at Rs320.25 on Friday.
Volvo officials did not give a definitive answer to why they had agreed to such a high premium. Eicher shares have actually declined 32.6% since the two companies announced a joint venture in December.
Shares of Eicher Motors rose 20% to close at Rs384.30 each on Monday on the Bombay Stock Exchange in a weaker broader market, on news the proposed share buy-back will have to be at the price that Volvo purchased shares, a move that will help boost the scrip’s value.
“It is a good deal for shareholders. If they are getting anything more than Rs550 a share, they should sell,” said an analyst with a Mumbai-based brokerage who wished to remain anonymous as he is not allowed to speak to the media.
Rising costs of raw materials such as steel, aluminium and crude oil have squeezed margins of automobile companies in the past two quarters.
For the fiscal year ended March, Eicher Motors had a net profit margin of 2.8%, down from the 3.1% it posted a year ago.
Under the pact between India’s third largest truck and bus maker and the Swedish firm, Eicher Motors will sell its commercial vehicle, component and design services business to an unlisted unit for Rs202.2 crore. Subsequently, Volvo will pay Rs108.2 crore in cash and fold in its own truck distribution and service network into the unit for a 45.6% stake. The 8.1% stake that Volvo will acquire from the promoter firm will translate into a beneficial stake of 4.4% in the new unit, to be called VE Commercial Vehicles Ltd, giving Eicher and Volvo equal control of the joint venture firm.
“We are giving the shareholders the same opportunity to participate in the deal as the promoters,” said Siddhartha Lal, group CEO and managing director of Eicher.
At Rs691.68 a share, the buy-back will cost Rs97.5 crore.
The joint venture will take over Eicher’s three manufacturing facilities in Madhya Pradesh that have the capacity to make 48,000 vehicles a year. Par Ostberg, a member of Volvo Group executive management, will be its chairman, while Lal will be its CEO and managing director.
Volvo and Eicher will have equal representation on the board of the new company, Lal said. Volvo has also agreed to pay Rs40 crore to Eicher Motors and its promoters for not starting competing businesses.