Mahindra and Mahindra - Ssangyong takeover - USD 463mn: Edelweiss

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Mahindra and Mahindra - Ssangyong takeover - acquisition consideration of USD 463mn

n  Acquires company for USD 463mn

M&M has signed a definitive agreement to acquire a 70% stake in Ssangyong Motors for a total consideration of USD 463mn. This includes an equity investment of USD 378mn and a subscription to corporate bonds of USD 85mn infusion into the company.  The equity investments will be utilized to repay the long term loans effectively making it a debt free acquisition. 

n  Cross selling opportunities; distribution network drive the deal

The acquisition offers M&M two key benefits – (a) product technology as Ssangyong’s SUV’s are placed at segment just a step ahead of M&M’s current product offerings and (b) a distribution network in Europe (Ssangyong has 1,300 distributors outside Korea). This will lead to cross selling opportunities –M&M’s products, notably the global SUV (to be launched in 2012) are likely to be showcased in Europe while two of Ssangyong’s models including the new Karando C are to be launched in India in 2011.

 

n  Ssangyong - on a turnaround

Ssangyong’s performance in the past three quarters has been encouraging. In 10MCY10, the company has reported volumes of ~65,000 (more than 2xCY09).  More importantly, EBITDA margins have been consistently positive over the past three quarters. We believe that with labour issues seemingly resolved, cost cutting measures likely to be taken and new products (the Korando C) finally being launched, Ssangyong could be on a turnaround.

n  R&D expenditure/ thin product pipeline key concerns

After the recently launched Korando C, the product pipeline of Ssangyong remains thin. While the management has indicated that there could be technology sharing opportunities (thereby reducing M&M’s capital expenditure), there is a possibility of greater R&D expenditure in the coming years.

n  Outlook: Reasonable valuations, Strategic acquisition; maintain ‘BUY’

The acquisition fits well with M&M’s strategic ambition of becoming a global SUV player. The valuation implies an EV/Sales of ~0.4XCY10 which is reasonable given Ssangyong’s recent financial performance. We view the acquisition seems positive from a medium-term strategic perspective. We maintain ‘BUY’ on M&M with a target price of INR845.