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Business News/ Industry / Manufacturing/  Mahindra shifts from M&As to stitching up global alliances
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Mahindra shifts from M&As to stitching up global alliances

Under a new deal, Mahindra will hand control of its domestic components business to Spanish firm CIE Auto

Anand Mahindra, chairman, Mahindra Group (left), and Anton Pradera, chairman, CIE Automotive, at the signing of the global alliance agreement. (Anand Mahindra, chairman, Mahindra Group (left), and Anton Pradera, chairman, CIE Automotive, at the signing of the global alliance agreement.)Premium
Anand Mahindra, chairman, Mahindra Group (left), and Anton Pradera, chairman, CIE Automotive, at the signing of the global alliance agreement.
(Anand Mahindra, chairman, Mahindra Group (left), and Anton Pradera, chairman, CIE Automotive, at the signing of the global alliance agreement.)

Mumbai: Mahindra and Mahindra Ltd (M&M) has made a significant departure from its previous mergers and acquisitions (M&A) strategy in stitching together a global alliance with Spanish auto components maker CIE Automotive SA.

Under the multi-layered deal announced on Saturday that involves a share swap, M&M will hand control of its domestic components business to the Spanish company; in return, the business will gain global scale. Ceding control of a unit to another entity is rare for M&M, which has made 35 acquisitions in the past decade.

“This is very atypical for the Mahindra group where we de facto look for managerial control right from the word go," said Anand G. Mahindra, chairman of the $16.2 billion Mahindra group, which has made M&A intrinsic to its growth strategy.

“We thought long and hard, and did something uncharacteristic for us, for our stakeholders and shareholders," Mahindra told journalists at the company’s headquarters in Mumbai. As part of the transaction, Mahindra will merge all its auto components businesses into its Mahindra Forgings unit, which will be renamed Mahindra CIE Automotive. CIE will hold 51% of Mahindra CIE and Mahindra about 20%, with the remaining owned by institutional and public shareholders.

Hemant Luthra, president of Mahindra Systech, as the auto components business is known, said the unit had acquired 10 companies in the past eight years, making consolidation critical. It’s important to create “one Systech" and greater value, Luthra said.

Mahindra, which has been the majority equity holder in most of the M&A deals it has struck in the past, has a history of buying out its joint venture partners’ stakes. In December, Mahindra bought US truck maker Navistar Inc.’s 49% stake in Mahindra Navistar Automotives Ltd and Mahindra Navistar Engines Pvt. Ltd five years after forging the partnership.

In April 2010, it bought out French auto maker Renault SA’s 49% stake in a five-year- old joint venture, Mahindra Renault India Pvt. Ltd.

Luthra, however, maintains that the reasons for each of the buyouts were different and one cannot call it a trend. In the deal with CIE, there are a host of complementary features in terms of customers, geographies and technology.

Harish H.V., a partner in the India leadership team at (consulting firm) Grant Thornton, said such structures create interest on both sides. “The first preference is always full acquisition, but sometimes it is not possible due to the promoter and management’s reluctance. In such a scenario, companies may decide to partner together," he said.

Mahindra said the imperative for the deal with the $2.2 billion Spanish firm that has operations across Europe, South America and China, was to consolidate Mahindra’s auto component business and achieve global scale.

However, the company could not have done so without financial resources and managerial bandwidth. The deal, therefore, will help the firm in accelerating the objectives. Mahindra’s auto component business comprises companies that are into forging, casting, stamping, gears and composites. Mahidnra Systech clocked revenue of 4,000 crore in fiscal 2013.

“CIE came with almost the same business objective with India on their radar," said Mahindra.

For CIE, it means gaining entry into a fast-growing market where it currently has no presence. “We have a strategy to develop India as the gateway to the Asian market," said Anton Pradera, chairman of CIE Automotive.

The agreement will see the formation of a global automotive component supply network with combined annual sales of approximately 15,000 crore with operations in North America, South America, Europe and Asia held through listed businesses in Spain, Brazil and India.

The sale by Mahindra will trigger open-offer provisions under the Securities and Exchange Board of India (Sebi) rules. As per the Indian takeover rules, any company buying a 25% stake in a listed Indian entity will have to launch an offer for at least 26% more from the public.

The deal, according to Raveendra Chittoor, assistant professor for strategy at the Indian School of Business in Hyderabad, would help Mahindra and Mahindra to focus on its core business of manufacturing passenger vehicles better.

“In a way, it’s a signal from the management that they want to focus on the core business," he said, adding Mahindra was one of the few auto makers which, instead of having a strategic partnership or interest in the auto components business, had owned it fully. Moreover, it would have taken the company several years to build a world class business on its own, he said.

Some analysts have their reservations over such deals. According to Praveen Chakravarty, chief executive, investment banking, Anand Rathi Securities Ltd, stock swap deals are not easy to work out as it is tricky to draw valuations, particularly in unlisted firms.

“How do you value access to a new technology and access to a new market and return on equity? We don’t hear of too many such outbound deals as holding company structures are not very common in the US and Western markets," he said.

As part of the cross-border swap deal, reached after two-and-a-half years of negotiations, CIE Automotive would take a majority stake in a single listed entity in India. This entity would continue to operate the current automotive component businesses of Mahindra Systech globally. This would also include CIE’s European forgings operations.

M&M on the other hand, would take a 13.5% stake in the parent company of CIE Automotive, which is listed in Spain, making it the second largest shareholder in CIE. M&M will nominate two directors to the CIE board. The deal, said Mahindra officials is “cash neutral".

CIE would invest €100 million for the stake and M&M would use the proceeds to buy into the Spanish firm. As part of the deal, M&M also gets to appoint directors on CIE’s board.

Experts said stock swap-based outbound deals are a rarity. “Such transactions, if undertaken, are typically with the long-term goal of taking over a company. It’s not unusual that transactions with such goals often start with a partnership," said an investment banker, who is an expert on overseas mergers and acquisitions. He requested anonymity.

Mahantesh Sabarad, senior vice-president, equity, at Fortune Equity Brokers Ltd, said the deal would transform the components business of Mahindra and Mahindra into a multinational company and give it access to cheap funding for Indian operations. According to him, had Mahindra consolidated the companies under Systech, without this deal, the merger would have taken longer due to court and shareholder approvals required for the purpose.

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Published: 17 Jun 2013, 12:36 AM IST
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