Motherson Sumi goes for mega German buy

Motherson Sumi Systems, a Delhi-based auto ancillary company, along with group arm Samvardhana Motherson Finance, is set to acquire 80 percent of Peguform Group, a German company. It has not disclosed the price of the acquisition, but the buyout, once complete, will make Motherson two times bigger in terms of revenue.

G N Gauba, CFO of the company, said the group has roped in an Indian bank - which has not been identified - to lead a consortium to fund the transaction. He said the entire deal would be funded through debt. The financing would be a combination of leveraged buyout (LBO) and promoter debt. A leveraged buyout means borrowing against the target company's assets- in this case Peguform.

Motherson Sumi's share price fell 2.7 percent after the announcement. Adnan Abidi /Reuters

Peguform's 2010 sales stood at Rs 8,494 crore with a reported operating profit (EBIDTA) of Rs 414 crore. Since Peguform is privately owned, detailed financial numbers are not available. However, if the company is making profits, the cost of acquisition could be close to 8-10 times the operating profit. This means the Motherson Group could pay close to Rs 4,000 crore. This number does not include the debt on the books of Peguform. The company says it would announce financial details only after the funding is tied up.

Motherson Sumi's share price fell 2.7 percent after the announcement. The BSE Sensex rose 0.8 percent However, Motherson Sumi shares have outperformed the broader market over the past one year. Shares went up 80.3 percent while the BSE 500 index rose 8 percent during the same period. The BSE Auto index is up 24 percent, but it also includes all automobile makers, besides component companies.

For the year ended March 2011, Motherson reported a consolidated revenue of Rs 8,176 crore against Rs 6,702 crore revenue for March 2010. The company's net profit jumped 61percent to Rs 390 crore during the same period.

Peguform is a supplier involved in development, manufacturing and distribution of bumper systems, plastic components for vehicle exteriors, vehicle cockpits, dashboards and vehicle interior trims. It operates 19 plants at production sites in Germany, Brazil, China, Mexico, Spain and Portugal within close proximity of its clients and employs some 6,500 people worldwide. The acquisition is in line with Motherson's strategy to have manufacturing facilities of components closer to its customer base.

Over the next 4 years, Motherson had outlined a growth plan to ramp up its revenue to Rs 22,000 crore from the current Rs 8,100 crore. This acquisition, once done, would take the company closer to the target. However, in the short term, the company would have to focus on improving margins in this acquistion. Currently, Peguform's operating margins are close to 5 percent. This could impact Motherson's consolidated profitability and put the company's share price under pressure.

Motherson Sumi had a cash and bank balance of Rs 360 crore and debt to the tune of Rs 1,254 crore. However, this cash is usually held in subsidiaries and not meant for inorganic growth in the parent company, added Gauba.

He had said in March 2011 that the company was willing to look at companies with niche technologies that customers would be interested in. Gauba said most acquisitions are made in the interest of the existing customer. Clearly, this acquisition seems to be for scale. He said the acquisition had synergy with the company's global as well as Indian operations.

The Motherson Sumi Group has 68 entities in its fold. The company has operations in locations around the world close to the assembly plants of car makers. Gauba said the company usually buys businesses in distress that are geographically closer to the company's customers.

Click here for the company release on the deal.

Indian auto component companies have used the acquisitions route to achieve scale. Read this report by credit agency ICRA.