Acquisition of Ssangyong is good strategic fit and is at a reasonable valuation.
Mahindra & Mahindra (M&M) has signed an agreement with Ssangyong Motor to acquire 70 per cent stake in the South Korean automaker for $463 million that entails $378 million in new stock and $85 million in corporate bonds.
The valuation pitches enterprise value of target at a multiple of 0.4x CY10 sales estimates, which is reasonable, according to Edelweiss research, given that sales and margins for Ssangyong have turned positive in the last three quarters. The cash infusion will be used to pay off existing liabilities of the South Korean auto manufacturer, which is currently in court receivership and has been undergoing a corporate rehabilitation process since February 2009.
There are clear synergies between the two companies given the target’s sports utility vehicle (SUV) range are in the immediate upper segment to M&M’s products allowing a smooth expansion of its product portfolio in domestic markets, while opening a growth avenue for Ssangyong. Also, Ssangyong’s relatively strong presence in Europe and 1,200 overseas distributors is expected to assist in M&M’s overseas push, given the expected launch of its global SUV in 2012.
Analysts suggest the resolution of labour issues will also help with cost cutting buffering margins even as new product launches rejuvenate sales. The last three quarters have seen strong performance by Ssangyong with reported sales volumes at 65,000 in the first ten months of 2010, double that of 2009 and Ebitda margins have also been positive in this period.
The negatives stem from the thin product pipeline of Ssangyong that may push up research and development costs, negating the capex benefits of the deal. Also, given the number of segments M&M has expanded into including motorcycles and commercial vehicles, losses in automotive segment subsidiaries are expected to mount given the early stage of these businesses, according to an IIFL report. This could add pressure on the stock, analysts say.
