Earlier this week, Maruti Suzuki India Ltd (MSIL) announced its decision to buy out its contract manufacturing partner Suzuki Motor Gujarat (SMG) from parent Suzuki Motor Corp. (SMC) at a potential book value of ₹12,755 crore. This was a surprising move, given in 2014 Maruti Suzuki had a hard time convincing its investors, including minority shareholders, that its decision to have its parent invest in a factory while it invests its cash stockpile on strengthening its brand and distribution, was fair game.
Eight years later, changing market dynamics and the need to streamline a mammoth capacity of 4 million units it is going to build over the ongoing decade, Maruti Suzuki wants direct control.
But what about minority shareholders? Will this company, with ₹46,800 crore in cash reserves, be able to ensure the transaction is fair to them? Experts and analysts tracking the company feel the deal is kosher and has sufficient safeguards for minority investors.
In 2014, MSIL decided not to invest directly in a new manufacturing facility but invest its cash instead in its sales and marketing infrastructure. The transaction got the approval of minority shareholders, thanks to the provision that MSIL could obtain a stake in the factory at book value. Now, the same provision is likely to give minority investors relief at MSIL’s buying price for SMG. To be sure, MSIL had a cash stockpile of ₹46,800 crore as of 30 June. “A quarter of MSIL’s production is managed by SMG, which could cause complications in our management structure going forward. Both SMC and MSIL agree it is best if both production and production-related activity is brought under a single company,” Bhargava told reporters in a conference call after the decision was announced.
Maruti Suzuki’s shares closed 0.94% lower at ₹9,625.00 on the National Stock Exchange (NSE).
The decision to terminate the contract manufacturing agreement was made with the consent of both parties, and MSIL will now exercise a provision in the agreement to buy out all of SMC’s equity on the basis of its book value. “How the equity will be acquired and in what form will be decided in a separate board meeting. The result of this will not in any way affect the production or profits in the company, but it will facilitate MSIL’s working in that it becomes more streamlined and well-handled,” Bhargava said.
The SMG factory is also the site of MSIL’s planned electric vehicle (EV) production facility from 2025. MSIL also has a wholly owned battery manufacturing factory in Gujarat, which remains unaffected by the acquisition.
“While we are surprised by the sudden decision to terminate the arrangement, the net book value transaction is fair from a minority shareholder’s perspective. From a financial perspective, this may not impact EBIT margin of the merged entity and hence with capital base increasing, the return on capital employed may be negatively impacted by ~1-2%. The positives being that production and powertrain planning becomes much simpler in long term”, Jay Kale, senior vice president, Elara Capital said.
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Updated: 03 Aug 2023, 01:40 AM IST