After three years of intense operational and cost restructuring that followed their ambitious global expansions, Indian auto components players are on the prowl once again scouting for global assets that can provide cutting-edge technology, market and customer access.
Leading the charge is Mumbai-headquartered Mahindra & Mahindra. According to two independent sources, Mahindra Systech, the group’s umbrella entity under which all its 16 auto component and engineering services companies operate, has been shortlisted for the buyout of a 100 year-old listed Canadian auto parts manufacturer Wescast Industries.
They said Mahindra Systech and four other potential suitors from China and the US have qualified after an initial round to a second round of financial bids, before getting shortlisted for exclusive diligence and dialogue.
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The total deal size is expected to be around Canadian $175 million.
Sources said, initial bids have all come around Canadian $12-12.5/share, a premium to the current price and may go up as it gets intensified. The promoters of the company hold 80 per cent, and after buying them out, the potential suitor will have to issue an and open offer for the residual stake held by the public and other institutions and take it private.
A Mahindra spokesperson did not want to comment on “speculative news”, while Wescast’s management did not respond to Business Standard’s email query. In March, however, the company’s board had stated they would undertake “a review of strategic alternatives with the objective of enhancing shareholder value”. It also had established a special committee to assist with the process.
Mahindra Systech had bought Germany's Jeco Holdings, a forgings company, in late 2006 for Rs 830 crore, the largest outbound auto component acquisition at that time. This was later followed by another German buy-out Schoneweiss in 2007.
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Wescast, listed in the Toronto exchange, is in the business of exhausts. It is one of the world’s largest supplier of exhaust solutions for passenger cars and light commercial vehicles with design, manufacturing and sales centres across eight countries in three continents — the US, Europe and Asia. The company also manufactures turbine housing, integrated turbo-manifolds and catalytic converter containers. These are made of ductile iron, compacted graphite iron, and various levels of SiMo ductile iron manufactured in the company’s units.
Wescast has been a leading supplier to most leading original equipment manufacturers, and their client list includes marquee names like Porche and BMW to the Big 3 of Detroit General Motors, Chrysler and Ford. It has a diversified pool with European and Japanese auto and light commercial vehicle manufacturers also in its roster, including Volkswagen, PSA Peugeot Citroen, Renault, Audi and Isuzu. It claims to have a market share of 51 per cent of the North American exhaust manifold market while in the Europe the share is claimed to be 14 per cent.
But the Ontario-headquartered company, that began its journey from a stove foundry in 1902, got squeezed by the restructuring of the ‘Detroit Three’ during the recession of 2008-09, which saw it going into red with a $22 million loss. It has since then turned around on new orders worth $80 million to supply to major European and Japanese manufacturers — new business for the company's emerging stainless steel operations.
Earlier in the year, Wescast also announced plans to expand the capacity of its stainless steel factories in Ontario, China and Hungary as it closed calendar year 2010 with a profit of $16 million. This year, the company expects to clock an even better performance.
However analysts say that with a prediction that the auto industry will grow by up to seven per cent this year, and Wescast turning itself around financially, the company could become an attractive target for potential buyers.
After the downturn, most global component supplier had been seeking alliances with Indian companies. “Moving forward this will be the trend for India as the plan would be not to restrict themselves only to the Indian boundaries,” said Abdul Majeed, leader for automotive practice, PricewaterhouseCoopers.
Like its peers in India, after a series of acquisitions in Europe and India, Mahindra Systech, the third biggest auto component group in India after Bharat Forge and Tata Auto Comp Systems, had been quiet since the past three years as a result of a slowdown in operations.
Nearly half of the 24 plants it owns are based outside India, mainly Europe. Owing to the financial downturn that hit Europe and US two years ago, these plants were made to run at less than half their installed capacity.
This resulted in a net loss of Rs 106 crore in the year previous to last.
However, with improvement in manufacturing levels for cars and commercial vehicles across the Europe and sustained demand in China, Mahindra Systech managed to record a profit of Rs 102 crore last financial year coupled with a growth of 33 per cent in revenue at Rs 4,100 crore.
Mahindra Systech provides solutions to companies and brands like Renault, MAN, Volvo, Scania, Daimler, Land Rover to name a few. It has presence in steel, forgings, casting, stamping, composites magnetic products telematics and engineering services.