Mahindra to buy stake in Peugeot's scooter business

Will pay Rs 100 cr for the stake along with a further commitment of Rs 115 cr for product development

Mahindra Two Wheelers (MTWL), the loss-making subsidiary of sport utility vehicle (SUV) market leader Mahindra & Mahindra (M&M), has made a binding offer to acquire 51 per cent stake in Peugeot Motorcycles (PMTC), the scooter company owned by France’s PSA Peugeot Citroen.

The Mumbai-based firm will pay euro 13 million (Rs 100 crore) for the stake, along with a commitment of euro 15 million (Rs  115 crore) for product development in the debt-free company. In return, MTWL will get access to the French company’s product technology and the opportunity to tap into Peugeot’s European footprints.

This is the first major acquisition by M&M in this segment after having entered the two-wheeler space through the acquisition of Kinetic Motor Company in 2008. With an accumulated loss of Rs 1,250 crore by the end of last year, resulting in an erosion of more than 50 per cent of its peak net worth, MTWL remains a potentially sick company. Through this deal, M&M is confident of giving its scooter play a boost, leveraging on the technology offered by Peugeot to effectively compete at home against scooter giant Honda, which controls 55 per cent of the domestic scooter market, and other rivals such as Hero MotoCorp and TVS Motors.

SHIFTING GEARS

• Mahindra Two Wheelers  will pay euro 13 mn for the stake, along with a commitment of euro 15 mn  for product development in the debt-free firm
• This is the first major acquisition by M&M in this segment after buying Kinetic Motor Company in 2008

Despite getting three board seats (one higher than Peugeot), M&M wants Peugeot’s management to continue steering the company. Peugeot will retain its premium branding even as M&M continues to focus on the high-volume mass market. Further, M&M has stated that it is not seeking to raise its stake beyond 51 per cent in Peugeot at this stage.

Peugeot has 13 product lines, seven engine capacities ranging from 50cc to 400cc, and two manufacturing plants, including a joint venture in China. Peugeot’s pricing (entry at euro 1,200 or Rs 93,000) is significantly higher than those offered by Mahindra (entry at Rs 33,760).

With sales of 79,000 units in 2013, Peugeot’s turnover at euro 99 million (Rs 762 crore) was the same as MTWL’s though the Indian company’s unit sales were twice the sales of the French company at 213,000 units.

Pawan Goenka, executive director of Mahindra & Mahindra, said: “Mahindra would offer access to the India market, mass market product technology and competence in marketing, while Peugeot brings the premium range, a strong European footprint and a globally recognised brand. This partnership would enable both MTWL and PMTC to speed up their international expansion by driving synergies and leveraging respective strengths of both parties.”

The two companies have agreed to work on four areas, brand building, global expansion, product development and synergies in purchasing. The two brands will remain independent and there will be no co-badging on products as well as in sales distribution. M&M would approach this deal on the same lines as it did with Korean SUV maker SsangYong.

While Europe remains an important market it presently accounts for just 2.2% of the world two-wheeler volumes. India and other south Asian market will form a part of the future target markets for expansion, M&M executives said. India accounts of 21% of the global two-wheeler volumes.

"There is a significant price gap between the two companies. Peugeot's products are too expensive for India. We will have to see if it makes sense to bring them here", added Goenka.

The deal which is subject to approval from Works Council consultation, which is a part of the employee dialogue process and anti-trust law, will be complete in three months. "Over the next six months we will decide on what products and which markets we need to explore. Peugeot's strength is its styling which we can leverage", said Rajesh Jejurikar, the Two Wheeler Division head.

Peugeot has 800 employees including 500 employees working in the China joint venture company. The company will undertake a restructuring exercise before the deal is complete. M&M has assured Peugeot's management that it wont initiate any restructuring work for two years after the stake buy-out.

After having closed an engine plant two years ago the scooter business for Peugeot had become a 'drag and a burden on the group', according to chief executive, Carlos Tavares, who took charge in March. The company had been exploring solutions for the beleaguered unit since several months. According to reports Peugeot's scooter business is yet to return to profit and has been posting losses for a decade.