South Korea’s Ssangyong Motor Company announced that Mahindra & Mahindra (M&M) was the preferred bidder in its quest to find a strategic investor. It was one among six bidders for the failing auto company, whose prime attraction for bidders would be its product line-up, mainly sports-utility vehicles, and global sales network. M&M will now enter into a memorandum of understanding with Ssangyong, undertake due diligence followed by the final agreements. It can be considered a done deal unless the due diligence uncovers something that was not disclosed earlier.
The proposed consideration has not been disclosed. Ssangyong is a listed company with a market capitalisation of approximately $467 billion won or about $400mn. The company’s price fell by 8.5% after the announcement was made, perhaps reflecting the street’s estimate of the acquisition price or disappointment at one of the big global auto companies not making the grade. M&M’s share fell when the news was first announced but closed the day up by 0.8%.
Ssangyong’s market capitalisation gives one estimate of the price M&M may have bid to acquire the company. In calendar 2009, Ssangyong’s sales were about 1 trillion Korean won or $834 million or about Rs 3,900 crore. The price to sales seems rather cheap at about 0.5 times. But that is because of the losses it has incurred. In 2009, it incurred a net loss of $291mn or Rs 1,350 crore. The company incurred losses in 2008 and 2009 and also suffered a steep 56% drop in sales in 2009.
It has accumulated losses of $609mn but has a positive net worth of $253mn. But it has liabilities (these should primarily comprise loans) of $917mn, translating to a debt to equity ratio of 3.6 times. In December 2009, the company implemented a restructuring plan, involving an equity reduction and a conversion of a portion of its debt into equity. That plan also includes a debt repayment schedule, with large portions repayable only after a three year grace period, higher in certain cases.
M&M will have to assume all these liabilities too. It has a balance sheet size of about Rs 27,000 crore but its debt equity ratio is 1:1. This is based on gross debt and does not consider cash of Rs 2,700 crore, investments of Rs 4800 crore and loans and advances of Rs 10,770 crore. A portion of investments and of loans and advances may be short term and hence liquid in nature. More clarity will emerge once the actual consideration and the liabilities that M&M will achieve.
What is M&M hoping to gain from the transaction? The transaction will initially lower M&M’s margins and will most likely see its debt move up, and hence affect its debt to equity ratios. But M&M’s attempt will be to restructure the company’s operations and balance-sheet. Ssangyong was a profit making company in 2007 and even now is making profits at the gross margin level (sales less cost of goods sold). M&M’s focus will be to lower costs, improve efficiency and ramp up production.
That is one part. But M&M also has ambitions in the passenger car segment, which will get a leg up after this acquisition. M&M has traditionally been a strong player in the Indian utility vehicle market. Ssangyong’s strengths too is the sports utility vehicle market, with brands like Rexton, New Kyron and Actyon. It also sells multi-purpose vehicles under the Rodius and Stavic brands and a luxury passenger car under the Chairman W brand. The company has a tie-up with Mercedes-Benz AG for technology, management and distribution which gave the company access to advanced technologies and to global markets.
Large Indian companies acquiring global companies have two main reasons for doing so, apart from possessing strong capital raising capabilities. One, they want access to the technology and manufacturing processes that can help them make products that can rival foreign competitors who are entering the Indian market. Two, they also want to become global players and lower their exposure to one market.
M&M is already a global player but the Ssangyong acquisition gives it UV portfolio a big boost. Its eventual aim would be to take one or two products from Ssangyong’s portfolio and launch them in the local market. In the passenger car market too, it has taken over the reins of Mahindra Logan. Its initial effort will be to boost the company’s sales growth even as it lowers costs. Ssangyong has had labour troubles in the past and this will perhaps be the first big test for M&M. If it is able to get the workers on board, it will get a fighting chance, else it will be an uphill task.