BMI View : A successful bid for 50% of Aston Martin would allow M&M to diversify its India-centric revenues. However, we are sceptical on the potential synergies which can take place between these two companies. While financing the deal will not be an issue for cash-rich M&M, we believe being a passive investor without any management control may not be in the best interest for the company. As such, we believe the recent run-up in M&M's share price is overdone and we expect to see a correction in the near term.
Indian automaker, Mahindra & Mahindra (M&M) hopes to seal up its deal to buy a 50% stake in Aston Martin from Kuwait's Investment Dar, its majority shareholder, by the end of the week. While there is another bidder involved, a European private-equity firm, Investindustrial, reports suggest that M&M is in the lead due to its higher bid offer. Investindustrial however, believes that its offer of GBP200-250mn for the 50% stake is technically superior, as it includes a partnership deal with Mercedes-Benz. Besides the offer price, Investment Dar is also interested in what the bidders can offer for Aston Martin's long-term plans.
We believe M&M can enjoy some advantages from this deal. Currently, the company is highly exposed to the Indian market and we believe this deal would be a quick way for it to diversity its revenue streams. Its FY2012 (April 2011-March 2012) revenues were roughly INR630bn, with about 70% of them coming from India. While M&M's business has done very well in India over the past few years, given the headwinds we have highlighted for the Indian auto industry, such as tight credit as well as recent tax proposals on diesel vehicles to make them more expensive ( see our online service, November 28, 'Diesel Environmental Tax Risk To Sales'), it may not be a bad time for M&M to diversify its business.
|Fortress Balance Sheet|
|M&M End FY2012 Financials- Balance Sheet Items, US$ Mns (LHS); Financial Ratio (RHS)|
In terms of financing, we believe the company is well-capitalised to conclude the deal should it become the successful bidder.
With almost US$1bn of cash and equivalents on its balance sheet as of end FY2012, M&M would not need to raise any debt for the deal. Furthermore, additional financing requirements for the Aston Martin business would be comfortably met by taking on additional debt. With its debt-to-equity ratio at a healthy 0.37, further borrowing would not put M&M in financial distress.
While M&M would have been encouraged by the success of Jaguar Land Rover since its takeover by Tata Motors, another Indian auto brand, we are sceptical on the actual synergy prospects of this deal. To be sure, while M&M can repeat the success which Tata enjoyed with Jaguar Land Rover, we believe this deal has different considerations. Given that M&M's auto businesses in concentrated in commercial vehicles (CVs) as well as farming equipment, there would be very little, if any, synergy with a luxury carmaker such as Aston Martin. While M&M will be able to get access to Aston Martin's technology, we do not see it as greatly benefitting its CV and SUV businesses. Instead, we see the Aston Martin brand as raising the international profile of M&M and giving it more brand recognition.
There are reports that M&M is unable to conclude a deal because of management control issues with Investment Dar. We believe a passive investment in Aston Martin without any say in the company's direction may not be in the best interest for M&M. While M&M will get the opportunity to diversify its revenues, its role will become more of a long-term financier for cash-strapped Aston Martin, rather than that of an equal partner.
|On A Tear|
|M&M Share Price (INR)|
The recent run-up in M&M's share price has seen the company's shares now trading at all-time highs. We believe the company might be overreaching slightly in its interest for Aston Martin given its confidence from executing its business well over the past years. The recent run-up in its share price is overdone, and we believe with this announced M&A deal, a correction is due in the near-term.