Home >market >mark-to-market >Mahindra-CIE deal: Size does matter

Stock markets gave a thumbs-up to Mahindra and Mahindra Ltd (M&M) on Monday. Its shares closed 4.43% higher following Saturday’s announcement of an alliance of its auto component business, known as Mahindra Systech, with Spain’s CIE Automotive SA.

The alliance translates into crossholdings through a swap of shares. M&M will get a 13.5% stake in CIE (a listed company in Spain), making it the second largest shareholder. Meanwhile, CIE will acquire a 51% stake in the combined entity called Mahindra CIE Automotive, which will house all the listed and unlisted auto component businesses of Mahindra, along with the CIE’s forging businesses. Mahindra settles in with a 20% stake in the new entity.

What perhaps excited the market is that Mahindra gains access to global markets and technology in the auto-component business without any significant cash outflow. Unlike some acquisitions, which weigh down the parent’s balance sheet with additional debt, this deal has no negative bearing for Mahindra.

Further, over a longer period, the group’s aspirations to become a sizable firm in the international auto component space could fructify through the deal. “The deal will give scale ($3 billion in topline) under CIE management and access to several geographies, an enhanced product portfolio and technical expertise," according to Morgan Stanley Asia Pacific Research. It will gain access to mainly the Americas and Europe besides China and rest of Asia. Besides, the CIE group operates on a healthy operating margin of about 12-13%, which is positive for the combined entity.

Meanwhile, the deal unlocks value for stakeholders in the numerous auto-component firms. Shareholders of the listed companies, Mahindra Forgings Ltd and Mahindra Composites Ltd, which have waited for better days for a while now and seen an erosion in stock price, could gain through the open offer of 81 (market price 65) and 74 (market price 35).

Of course, even for those existing shareholders who have waited this far, another year or so may well be worth it, for they would be part of a larger global entity, which is perhaps at an inflection point. The CIE management in the analysts’ conference call said European operations are currently working at 75% of year 2008 volumes, and that it’s a matter of time before things get better from present levels.

That said, for Mahindra shareholders, the deal has no immediate financial implications. According to Emkay Global Financial Services Ltd, “Currently Mahindra Systech group firms contribute barely 4-5 in Mahindra’s target price of 1,120 and therefore is of no material significance."

The jump in stock price, therefore, is sentiment driven. The entire deal would also culminate only a year from now. However, analysts do believe that compared with a spate of small acquisitions the group made in the past in the auto component space, the CIE deal could catapult Mahindra into the global arena.

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