Motherson Sumi: PKC buyout a neat fit
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Over the past few years, auto component firm Motherson Sumi Systems Ltd (MSSL) has steadily added value to its product offerings for the vehicle industry, mainly through acquisitions.
On Friday, the firm announced that it is planning to acquire PKC Group Oyj, a Finnish global tier-I supplier of wiring harnesses to commercial vehicles across North America, Europe, Brazil and China.
MSSL’s offer price to buy out the listed shares of PKC is proposed at a 51% premium to the closing price on Thursday. Not surprisingly, PKC’s shares jumped by 50% to €23.4 apiece on the announcement.
On the home turf, the street reacted positively at the move as PKC fits in well with MSSL’s charted out course to spread its wings in the emerging markets apart from its stronghold in the European markets.
Rising debt, on the whole, has been a slight concern for MSSL investors. But the acquisition also comes when its overseas business—that accounts for about 85% of the consolidated revenue—has seen a steady rise in profit margins. Its subsidiaries, Samvardhana Motherson Reflectec and Samvardhana Motherson Peguform have turned profitable and MSSL’s track record of turning around acquired businesses has helped ramp up revenue and profits at a robust pace. The company’s September quarter’s consolidated operating profit rose by 15% and its operating margin of 10.7% was commendable, given the economic conditions in the overseas auto markets.
Meanwhile, MSSL’s strategy to raise funds (about Rs2,600 crore) through a qualified institutional placement will now come in handy to fund the PKC acquisition, which could total to about Rs4,150 crore. The only hitch is that MSSL has to make an offer to shareholders to buy them out. PKC then becomes a 100% subsidiary of MSSL.
That’s not all. Analysts are confident that the firm will maintain its growth momentum over the next five years. Brokerage reports forecast a 15-20% jump in consolidated revenue for the December quarter and a marginally higher operating margin, compared with earlier quarters, does not seem unreasonable. At Rs326, MSSL’s stock trades at a stable 20 times one-year forward estimated earnings.