Proxy advisors, analysts favour cash deal to acquire Suzuki Gujarat plant

Maruti says it wants to have multiple powertrain production at multiple locations under single control

Proxy advisory firms and analysts favour a cash deal for the acquisition of Suzuki Motor Gujarat’s (SMG’s) shares by Maruti Suzuki India (MSIL) as the carmaker has cash reserves of Rs 45,853 crore (as on March 31).

MSIL on Monday announced that it would acquire the Gujarat plant from its parent company, Suzuki Motor Corporation (SMC), to enhance its production efficiency and supply chain.

Shriram Subramanian, founder and MD of proxy advisory firm InGovern, told Business Standard that the move could be advantageous for minority shareholders, provided the valuation is reasonable. "Suzuki Motor Corporation (SMC) may also increase its shareholding in MSIL by selling SMG. We'll need to wait and see whether the transaction will be in cash or shares. A cash deal would be better because MSIL generates cash on a year-on-year basis,” he explained.

The deal size, according to analysts, is estimated to be around Rs 13,000 crore.

MSIL’s board has given the green light to the termination of the contract manufacturing agreement (CMA) with SMG and to the option of acquiring SMG from SMC. Motilal Oswal Financial Services said that the SMG plant will be purchased at a net book value, based on the agreement. This value was around Rs 12,700 crore as of March 2023.

The book value will be confirmed and adjusted by the auditors of SMG to ensure the no-profit and no-loss principle is reflected, Nomura said.

“The deal consideration and its payment mode shall be decided in the subsequent board meeting. Based on our calculations, we see an earnings per share cut of 4-5 per cent and a return on capital employed (RoCE) reduction of 90 basis points (cash payout) or a 310-basis point (equity swap) in FY25. We factor in the SMG acquisition in our FY25 estimates assuming a cash consideration of Rs 13,000 crore,” Motilal Oswal said in a note on Tuesday.

Analysts anticipate that the deal will enhance production efficiency and agility in decision-making.

Rahul Bharti, chief investor relations officer at MSIL, explained to Business Standard that MSIL’s actions are a response to the challenges they perceive in the automotive market. He said that when MSIL decided to expand its manufacturing outside Haryana in 2014-15, it preferred having Suzuki set up the manufacturing plant and streamline production, allowing MSIL to focus on market development, develop new models, and expansion of its Nexa channel.

"SMG did a great job setting up manufacturing – within six years, three plants came up; production was smooth and streamlined. By not investing in establishing the plant, we gained some interest income," Bharti said. Given the current emphasis on carbon neutrality, MSIL needs to develop and produce multiple powertrains – electric, hybrid, CNG, and ethanol – at various locations and on a larger scale. “With so many variables, we decided to unify all this under MSIL to achieve flexibility and speed," Bharti explained.

The CMA, MSIL had included an exit option, as well. Both parties can terminate the deal on mutual consent, and MSIL reserves the right to buy the company at net book value. “The CMA clauses, including the exit option, were approved by minority shareholders at the time. However, for corporate governance and respect for shareholders, we will seek shareholder approval again," Bharti clarified.

When MSIL initially decided to place the Gujarat plant with SMG, shareholders expressed strong disapproval, objecting to the transaction's nature and fair value of the Gujarat plant. They also feared MSIL’s status being reduced to a marketing company with lower profit margins.

At least 14 asset management companies, along with proxy advisory firm IiAS, had rejected the deal in the beginning, and it took almost two years for MSIL to complete the shareholder approval process in December 2015.

Hetal Dalal, president and COO of IiAS, said: “In principle, IiAS believes the Gujarat plant should be housed within Maruti -- in 2014, we did not support its ownership by Suzuki, and continue to maintain this position. To this extent, Maruti acquiring the Suzuki plant is a step in the right direction. However, we continue to await the contours of the acquisition.”