Mumbai/New Delhi : Mahindra & Mahindra’s acquisition of Punjab Tractors Ltd (PTL) just got a little costlier. India’s largest tractor and utility vehicle maker, which won a Rs951 crore bid to acquire a 43.5% stake in PTL on Thursday, will now spend an extra Rs485 crore to acquire an incremental 20% stake in the company, and in two other associates of PTL— Swaraj Engines and Swaraj Automotive.
According to market regulator Sebi, any firm that acquires a 15% stake in a company will have to make an open offer to its shareholders offering to buy shares amounting to an additional 20% stake. PTL owns a 33% stake in Swaraj Engines; 24% in Swaraj Automotive; and 14% in Swaraj Mazda.
M&M’s 63.5% (post-open offer, and conditional on this being accepted by the shareholders) stake in PTL will translate into an effective stake of 21% in Swaraj Engines, 15.% in Swaraj Automotive and 9% in Swaraj Mazda. The company will therefore have to make open offers to the shareholders of the first two.
“The basis for the 20% offer in PTL would be the same price at which we are buying the 43.3% stake. But for Swaraj Engines and Swaraj Automotive, we will follow the existing norm of the capital market regulator,” said Bharat Doshi, executive director, finance & corporate affairs, M&M. The market regulator’s formula for deciding on the price at which an open offer must be made is based on an average of the previous 14 days’ price or 26 weeks’ price of the stock.
Swaraj Engines has a market capitalization of Rs178 crore. Its stock closed at Rs143.65 on Friday. The stock of Swaraj Automotives, a seat manufacturing firm, is relatively less traded stock and its market capitalization is around Rs60 crore.
M&M plans to use a mix of debt and equity for the total Rs1,436-crore investment it will be making in PTL and its two associates. “We have substantial surplus funds on our books and we are capable of raising substantial debt. So we will be using a mix of it to fund the deal,” said Doshi. Currently, the company has Rs1,500-2,000 crore of cash and cash equivalents on its books.
Meanwhile, the M&M stock was hammered in a falling market following concerns that the company might have paid too much for the acquisition. The stock lost 4.36% to fall to Rs732.45 on the Bombay Stock Exchange while that of Punjab Tractors rose 1.81% to Rs309.5. The exchange’s benchmark index fell 1.26%.
“There are near-term concerns about the premium paid, how much debt they’ll raise and whether it’ll dilute earnings,” said Ashutosh Goel, an analyst at Edelweiss Securities. “But it’s a good buy since it will give the company more pricing power and purchasing economies.”
“We agreed to pay the Rs360 per share price, keeping in mind the benefits, synergy, and potential for better sourcing besides the value it holds for the shareholders,” said Doshi. Mahindra’s market share is likely to rise to 40% from 30% after the acquisition.