While it could be the last bastion to fall for Britain's automotive industry, Mahindra & Mahindra's (M&M) speculated bid for a significant stake in sports car maker, Aston Martin, seems to be the perfect ride for the firm that is looking to move up the value chain with a more complete automotive portfolio.
M&M is reportedly one of the two front-running bidders for a 50% stake in Aston Martin for a value of about 250-300 million pounds (R2,600 crore approx). Kuwait's Investment Dar is majority shareholder in the company. Mahindra competes with European group InvestIndustrial, which has offered a technology tie-up with Germany's Daimler AG that makes Mercedes-Benz cars.
However, M&M's advantage is a large existing automotive business with many group component firms that can help Aston Martin reduce cost of operations through backend synergies in sourcing.
Analysts feel that if the deal goes through, M&M may alas gain a foothold and distribution in the American car market, that has long been delayed owing to a legal tussle with an ex-distributor. The buyout will give the Mumbai-based automaker, which focuses on utility vehicles and also makes commercial rides and two-wheelers, access to high-end technology and platforms. It had also acquired South Korean SUV maker Ssangyong in 2010.
M&M is believed to have attempted other global acquisitions as well – Jaguar Land Rover in 2007 from Ford and Sweden's SAAB in 2012.
“M&M historically has seen success in taking assets at good prices, so till date it has not been a victim of the buyer's curse. For an investor, the company may not mean much, but for M&M its very important with the synergies they expect.
Till now a mass market player, their priorities will change as they focus on higher value product rather than just high volumes,” said VG Ramakrishnan, managing director, Frost & Sullivan, South Asia.
In June, M&M had said that it had earmarked R2,500 crore for acquisitions and investment in group companies. “The money will be used for acquisitions and equity investment in group companies,” M&M’s president of the automotive and farm equipment division, Pawan Goenka said.
“But, having said that, if we see that there is an interesting acquisition target which exceeds this budget, I’m sure we can raise the funds for that.”
Some analysts, however, view the purchase as an ‘unrelated diversification’. “The would require a lot of investment to meet Aston Martin’s growth plans and this is a totally unrelated diversification of the company with very little synergies,” said an analyst with a foreign brokerage firm on condition of anonymity.
Added a note from Edelweiss Securities, “Benefits of technology transfer from a luxury car maker to the Indian tractor and utility vehicle maker is questionable.”
However, pessimists on this deal may get allayed following compatriot automaker Tata Motors' recent example where it was successfully able to turn around JLR's operations after acquiring the company in 2007. JLR posted a $487 million profit in second quarter of FY13, up 77% over last year. The news on M&M failed to impress the stock markets. M&M share prices fell 3.37% at the BSE to close at Rs.922.
While some analysts have called the bid expensive, investors are largely believed to be worried on reports that say that M&M may not retain operational control.
“M&M is comfortably placed to finance the deal, but the main worry among investors was a lack of clarity on the deal. Also, there was news about the finance ministry receiving a proposal for higher tax on diesel cars — that will hurt M&M the most,” an analyst from a top broking house said.