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Business News/ Home-page / Investors give thumbs down to Eicher-Volvo
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Investors give thumbs down to Eicher-Volvo

Investors give thumbs down to Eicher-Volvo

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New Delhi: Investors reacted adversely to Eicher Motors Ltd’s announcement on Monday that it was hiving off its truck and bus business into a separate company and selling an effective 50% stake in this to Swedish company Volvo AB.

Shares of Eicher Motors fell 12.5% to close at Rs477.30 each on the Bombay Stock Exchange, off a record high, in a broader market in which the exchange’s benchmark Sensex dipped 0.2%.

Under the pact between India’s third largest truck and bus maker and the Swedish firm, Volvo will pay Eicher Motors $275 million (Rs1,084 crore) in cash for a 45.6% stake in the unit. It will also acquire an 8.1% stake in Eicher Motors itself, translating into a beneficial stake of 4.4% in the unit. Together, the two stakes will give Volvo equal control in the new company.

“I think the deal erodes shareholder value" for minority shareholders in Eicher Motors, said S. Ramnath, vice-president at SSKI Securities Ltd, a Mumbai-based brokerage. “They end up with shares in what’s a holding company."

Eicher Motors’ share price rose to a record Rs599 a share on Monday morning before the deal was announced, on speculation that Volvo would buy a substantial stake in the company and make an open offer to take over the firm, said analysts. Volvo will continue to independently run its bus and truck business based in Bangalore, said its deputy chief executive and executive vice-president Jorma Halonen.

Eicher Motors and Volvo did not disclose the terms under which the latter will acquire 8.1% in the former. At Monday’s closing price, this is worth Rs108.6 crore.

Under the terms of the deal, Volvo will also fold its own distribution and service network of about 10 dealers, which it values at $75 million, into the unit. The new company is expected to start operations by July 2008, after Eicher Motor acquires government and shareholder approval. The two partners will have an equal representation on the board of the unlisted joint venture.

Eicher has a 140-odd strong sales and service network through which Volvo will sell its products. Siddhartha Lal, managing director and chief executive of Eicher Motors, said the joint venture would use Volvo’s distribution channels in emerging markets such as South Asia and Africa to sell Eicher products. Commercial vehicles and related businesses, such as components, contribute to more than 80% of Eicher’s revenues and the company is now left with only its motorcycles business. Eicher makes the Royal Enfield brand of motorcycles. The company ended 2006-07 with revenues of Rs2,223 crore and a net profit of Rs61.26 crore.

“We want to be a full-range commercial vehicle player and expand in the medium and heavy segment of the market," said Lal. Eicher is a distant No. 3 in a market dominated by larger rivals Tata Motors Ltd, the largest truck maker in India, and Ashok Leyland Ltd, who, between them, account for nine out of 10 trucks and buses sold in India.

“From a business point of view, what they (Eicher) needed was good technology support," said Ashutosh Goel, an analyst with Edelweiss Securities Ltd. “This is what they have got along with the cash", to support further expansion.

The two firms would also explore entering into the financial services business, Lal said, but didn’t elaborate.

The Indian truck market is the fourth largest in the world with annual sales of more than 400,000 units. Although high interest rates have hurt sales this year, robust economic growth and higher fuel prices will drive demand in the future as truckers replace their ageing fleets with newer, fuel-efficient vehicles, say analysts. This has prompted foreign truck makers such as MAN Nutzfahrzeuge AG and Nissan Motor Co. to enter a host of alliances with local players and invest as much as $10 billion in building new factories to tap into the market.

ravi.k@livemint.com

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Published: 11 Dec 2007, 12:22 AM IST
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