Timken India’s pricey deal a boon for ABC Bearings’ shareholders
On Wednesday, in a pricey but smooth deal, global bearings manufacturer’s Indian outfit Timken India Ltd (TIL) took over domestic player ABC Bearings Ltd (ABL). Pricey it is, because shareholders of ABL will get five TIL shares in exchange for eight of ABL. This implies a 77% premium to ABL’s market price (Rs238 on Tuesday). The euphoria was visible on the Street too, as ABL shares vaulted 20% on Wednesday, even as TIL shares surged by 16%.
The deal is indeed an excellent proposition for ABL shareholders. They now become a part of a global bearings manufacturing firm whose annual revenue and profit is about five times that of ABL. Besides, the capacity utilisation of less than 50% in recent times suggests that it has not been a smooth ride for ABL. This may be because it caters mainly to the commercial vehicle segment that has not been upbeat in the last few quarters.
On the other hand, the cash-rich TIL has been on a roll as it caters to a wide spectrum of domestic customers—industrial, railways, commercial vehicles including the replacement market and even wind energy. And, nearly half its revenue comes from exports, for which TIL plans to make India a hub.
But then, its March quarter revenue took a hit when the company had to expand capacity due to constraints in catering to the growing market.
According to Priya Raman, vice-president, auto and auto ancillary, Systematix Shares, ABL’s take over may lead to an equity dilution in the near term, but is certainly earnings accretive as TIL will gain capacity and market share along with a wider portfolio.
Perhaps, TIL also sees the opportunity growing with the new goods and services tax (GST) making it hard for small players in the unorganized market to compete. In any case, ABL like many small and mid-sized domestic players has had a rough ride.
Chinese products have added to competition in the replacement market. And, global corporations like FAG Bearings Ltd, SKF Ltd and TIL that account for nearly two-thirds of the organized original equipment market are cash-rich enough to withstand business risks.
The TIL-ABL deal is likely to conclude by March 2018, when the latter’s shares will be dissolved and merged into TIL’s equity. Interestingly, the deal may be the precursor to more such in the bearings sector, where the big could get bigger in the next two to three years. Little wonder that all the stocks of bearings firms closed higher on Wednesday.