MERGERS AND ACQUISITIONS

Mahindra Ssangyong Deal

10th December, 2012

DEAL RATIONALE SYNERGIES

Sourcing and Procurement Both M&M and SYMC had a strong sourcing and procurement network in the respective regions which could be leveraged to achieve significant savings in cost. As an example, based on a press release by the company, M&M and SYMC planned to develop six new engines. The sourcing for these engines was to be done locally. As a result, M&Ms suppliers for crankshafts and connecting rods also became SYMCs suppliers while SYMCs suppliers for cylinder heads and water pumps became M&Ms suppliers. Cost benefits from joint sourcing are likely to be in the range of 7-15%. Product Development M&M and SYMC planned to share product platforms across all product lines from engines to vehicle platforms. SYMCs products are atleast two development cycles ahead of M&Ms products which can also be seen from the speed with which the two companies have developed SUV platforms. Over the period in which M&M developed 3 SUV platforms namely, Commander, Scorpio and Xylo, SYMC developed seven new platforms. Thus M&M is likely to benefit from superior product technology. Sales and Distribution SYMC has over 1250 sales offices in 96 countries with a captive market in the emerging markets like China, Russia and South Africa. The deal would give M&M access to SYMCs global distribution network while also providing SYMC a developed distribution network in India to market its products. Research and Development One of the reasons for SYMCs superior product technology is the well-developed R&D unit with strength of over 600 employees. M&M will gain access to this research expertise which it can leverage to create products for both the Indian as well as international markets. Market Expansion Ssangyongs products are placed a segment higher than M&Ms current products as a result, M&M can cater to both the luxury SUV market and the low priced SUV market in India. The deal would also help M&M enter the fast growing emerging markets in particular Russia and South

Africa where Ssangyong has a strong presence. In turn, the deal would give Ssangyong access to the fast developing Indian SUV market. SYMCs SUVs are already Euro V compliant while the Indian SUVs are yet to achieve Euro IV compliance. Thus, the deal opens up the European market for emission-compliant products to Mahindra. Operations SYMC was already operating with considerable excess capacity. So, it would be easy for M&M to scale up the operations at SYMC to cater to any growth in demand. The deal would also give M&M a manufacturing base in South east Asia. Other synergies The deal could also help M&M exploit any synergies that may exist with other Mahindra group companies. For example, Mahindra Finance could set up operations in South Korea to finance the purchase of Ssangyong SUVs which would result in considerable gains to both companies.

DEAL VALUATION
Since 2004, Shanghai Automotive Investment Corporation (SAIC), the Chinese stateowned auto manufacturer held a controlling 51% stake in the Ssangyong. As a result of the court receivership, SAICs stake in Ssangyong was reduced from 51% to 11.2%. This accounted for a five-for-one write-down of the stake held by Ssangyong. Similarly, the other equity stakeholders took a three-for-one write-down in their stake. As a result of this restructuring, Ssangyongs creditors controlled 70% of the company with the remaining held by the equity owners. The total debt on SYMCs books at the time of the deal was around US $692 million. The deal was valued at US $463 million for a 70% stake in Ssangyong. Out of the total amount, US $378 million was used to buy new shares and pay back Ssangyongs long term creditors while the remaining was in the form of corporate debt. In effect, the deal resulted in M&M acquiring a debt free company as the long term creditors agreed to take a haircut on the total debt amount. Valuation Price paid for 70% stake 100% stake valued at Debt Balance debt after acquisition Cash $ million 463 601.9 692.9 314.9 85

Enterprise Value Sales

831.8 1651

The above valuation implies that M&M acquired SYMC based on a EV/Sales multiple of approximately 0.5. Ssangyongs market capitalization at the time i.e. Q3 2010, was around US $303 million. Therefore the enterprise value should have been around US $995.9 million. Based on the sales figure for the period, the actual EV/Sales ratio was around 0.6. Thus, M&M acquired SYMC at a discount of 16.67% to the actual EV/Sales ratio. For the automotive sector, the EV/EBITDA multiple would be more suited for valuation purposes because of the higher depreciation relating to the product. However, in this case the EBITDA value for SYMC was negative till Q2 2010 and was only marginally positive for Q3 2010. As a result, it would not be appropriate to use this multiple to value the firm as it would have resulted in a low valuation.

DEAL STRUCTURE
The deal was, in all likelihood, structured to include an optimal mix of internal accruals and long term debt. Although, no specific debt issues or loans were taken for the purpose of the deal, the likely deal structure can be estimated based on the credit worthiness of M&M based on the credit rating agencies outlook and the amount of cash at hand. Credit Rating Agency CRISIL CARE ICRA Rating AA+ Stable CARE AA+ LAA+ Stable

Based on the above table, it can be seen that M&M was rated favourably by all the leading credit rating agencies. Also, M&Ms Debt-Equity ratio in Q3 2010 was around 0.31 which was well below the industry average. Interest Coverage ratio was around 21.1 against an industry average of 10.4, further increasing its debt raising capacity. The total cash reserves at hand were to the tune of Rs. 2500 crores. Since the deal was worth ~Rs. 2051 crores, it was likely that the deal would be funded using an optimal mix of debt and internal accruals.