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M&M forms a global alliance with Spain's CIE Automotive - Angel Broking
Posted On : 2013-06-18 21:16:41( TIMEZONE : IST )
Mahindra & Mahindra (MM) and CIE Automotive (CIE), Spain has entered into a global alliance for the automotive component business. The agreement involves amalgamation of all the component companies of Mahindra Systech (i.e. Mahindra Forgings - MFL, Mahindra Ugine Steel, Mahindra Composites, Mahindra Hinoday, Mahindra Gears and Metalcastello) with CIE's European forging business, which will be rechristened as Mahindra CIE. CIE Automotives will hold ~51% stake in the new entity, while MM will hold ~20% stake. The remaining ~29% stake will be held by the public.
The transaction involves cross investments by both the groups. According to the terms of the agreement, MM will invest EUR96.24mn (Rs. 739.25cr) through its subsidiaries for a 13.5% stake in CIE Automotive at a price of EUR6/ share, making it CIE's second largest shareholder. MM would also nominate two Directors to the CIE Board. In turn, CIE's Brazilian listed subsidiary, Autometal will invest in the component business of Mahindra Systech. Additionally, MM will also buy Mahindra Ugine Steel's 51% stake in Mahindra Sanyo Special Steel Private Limited (MSSSPL) for Rs. 214.33cr and surplus land for Rs. 126cr.
The share sale by MM has triggered open-offers in MFL and Mahindra Composites, which have been separately announced. Further, the existing shareholders in the Mahindra Systech's component businesses will be issued MFL shares according to the swap ratio.
Outlook and valuation: We see this development as a major boost to MM's ambitions of emerging as a global player in the automotive component business. The new entity under the CIE management will have an enhanced product portfolio, access to newer geographies and superior technical expertise in the automotive component business. While the entire transaction is likely to involve a cash outflow of ~Rs. 410cr for MM, the major chunk (~Rs. 340cr) of it will be towards buying stake in MSSSPL and surplus land from Mahindra Ugine Steel. We believe that the deal is positive for the MM shareholders as it has led to value unlocking of the subsidiaries considering that MM has fetched premium valuations for its stake sale. We would be watchful of the further developments on this front. We recommend an Accumulate rating on MM stock with SOTP based target price of Rs. 1,090.
