Mumbai: Mahindra and Mahindra Ltd (M&M), the country’s largest utility vehicle (UV) maker, is set to take control of troubled South Korean auto maker Ssangyong Motor Co., beating out five other bidders as it actively seeks to extend its reach into more markets across the world.
The acquisition, the company’s fourth since its takeover of Punjab Tractors Ltd, Kinetic Motor Co. and more recently, Reva Electric Car Co., will be the largest investment by an Indian company in South Korea.
“We went for this with a clear strategic intent,” said Anand Mahindra, vice-chairman and managing director of M&M. “Our intent is to accelerate Ssangyong’s turnaround process and bring back its lost lustre.”
The controlling stake will provide the firm with an opportunity to accelerate its programme of becoming a globally recognized entity in utility vehicles, he said.
The company did not disclose the bid price, saying it was confidential. The other bidders included an alliance of French auto maker Renault SA and Japan’s Nissan Motor Co. Only three, including Indian tyre maker Ruia Group and a local headgear company, remained in the fray until the deadline for the bid ended.
To be sure, while “it announces M&M’s arrival on the global scene”, it will be an uphill task for the Indian firm to unravel the challenges Ssangyong has been facing, said Mohit Arora, executive director at JD Power Asia Pacific Inc., Singapore. The acquisition follows the takeover of South Korea’s Daewoo Commercial Vehicle Co. Ltd in 2004 by Tata Motors Ltd, India’s largest auto maker by value.
That acquisition would have given Ssangyong Motor confidence in an Indian firm’s capabilities, Arora said.
Analysts are questioning the implications of the deal on the firm’s financials as M&M hasn’t disclosed what it will pay. They said similarities in the product range of both firms would work to M&M’s advantage.
“If we exclude the financials, it makes sense from the business perspective,” said Joseph George, analyst at BNP Paribas Securities Pvt. Ltd. Both companies will save on product development and distribution expenses. “The synergy benefits will be easier to derive.”
With seven models and five brands in its fold, UVs are the Korean auto maker’s mainstay, accounting for 85% of its total sales volume. This was one of several factors that swung the deal in its favour, Mahindra said.
M&M’s shares closed at Rs632.65 each, gaining 0.80% on the Bombay Stock Exchange. The benchmark sensitive index, or Sensex, was little changed at 18,073.90 points.
The formal selection of the winning bid will be followed by a process of due diligence that will lead to transaction being finalized by the end of the year.
Ssangyong’s range includes the Rexton, Kyron and Actyon, besides the Chairman sedan. M&M will consider bringing Ssangyong sport utility vehicles (SUVs) priced upwards of Rs10 lakh to the Indian market, said Pawan Goenka, president (automotive and farm equipment sectors).
M&M expects to capitalize on Ssangyong’s expansive geographical presence in 98 countries and widespread distribution network of 1,200 dealerships across several continents. It also seeks to utilize Ssangyong’s expertise in product development and engine manufacturing, apart from the South Korean firm’s modern plants.
For its part, M&M will seek to restore the auto maker to health with its frugal engineering strengths and help rationalize costs by deploying the groups’ IT capabilities.The Korean firm currently has two manufacturing facilities in South Korea and a workforce of 4,800 people.
The troubles at Ssangyong, which commanded a one-fourth share in Korea’s UV market in 2003-04, started after rising oil prices and slowing demand due to the global slump hit sales of its UVs. In February 2009, the company was granted court protection from creditors.
Ssangyong sold 43,881 vehicles, including 26,190 overseas, in the first seven months of this year, compared with 13,091 deliveries in the same period a year earlier when workers’ action over job cuts disrupted production. In the year ended December 2009, Ssangyong incurred a loss of 638 billion won (Rs2,552 crore today).
Following restructuring initiatives currently under way and the expansion in sales volumes, it managed to narrow losses and posted a positive Ebitda (earnings before interest, taxes, depreciation and amortization) of 2.3% in the first quarter on net sales of $349 million (Rs1,637 crore today) against a negative Ebitda of 17.9% in 2009. As of 31 December 2009, it had a debt of $640 million.
Bharat Doshi, group chief financial officer and executive director at M&M, allayed concerns that the Indian firm would be buying a debt-ridden company with heavy liabilities. “It’s a well-structured programme of acquisition,” he said. Money from the bid will be used to settle long-term debts, he added.
China’s SAIC Motor Corp. Ltd owns 10% of Ssangyong, while around 70% is held by creditors, led by state-owned Korea Development Bank.
M&M’s immediate priority after the acquisition will be to revive Ssangyong’s product portfolio, make fresh investments and chalk out a combined sourcing strategy for both the firms to pare costs, Goenka said.
Reuters contributed to this story.