Indian partsmaker Motherson wants majority share in Germany's Peguform Group
NEW DELHI -- Indian partsmaker Motherson Sumi Systems said on Wednesday it would buy a majority stake in Germany's Peguform Group, but the euphoria gave way to worries about margins that dragged Motherson's shares down after an initial rise.
Auto ancillary firms in India typically look outside their home territory for buying opportunities, as high expectations from founders of smaller Indian companies have thwarted many potential deals.
Motherson would buy the debt-free Peguform, which expects revenue to rise about 17 percent to 1.6 billion euros this year, Vivek Chaand Sehgal, vice chairman of the Indian firm said. The company did not disclose the deal value.
By comparison, Motherson Sumi posted net sales of $1.8 billion in the 2011 financial year ended in March, but the group's revenue is expected to grow almost fivefold to $10 billion by the end of March 2015, from $2.2 billion in 2009-2010, Sehgal told Reuters in May.
"Motherson does not have the capacity to serve the size of the global market. It brings a lot of know-how and technology," Sehgal said on Wednesday about the Peguform purchase.
Peguform makes and distributes bumper systems, plastic components for vehicle exteriors, cockpits, dashboards and vehicle interior trims.
Motherson Sumi makes a range of auto parts from rearview mirrors to wiring harnesses and high-tension cords and supplies Volkswagen AG, Ford Motor Co., General Motors Co., Hyundai Motor Co. and Maruti Suzuki among others.
Volkswagen alone accounts for about two-thirds to Peguform's revenue.
The deal is expected to close in two to three months and will be funded through debt tied up from Indian lenders, Sehgal added.
The firm said in May this year that it was pursuing overseas acquisitions and joint ventures in the automotive sector and was conducting due diligences across the globe.
Motherson Sumi, which has earmarked a capital expenditure of about 5 billion rupees ($112 million) in 2011-2012, expects to commission four plants in India and one each in South Africa and Hungary this year.
Motherson Sumi will acquire 80 percent in Peguform from current owner Cross Industries, which will retain the remaining 20 percent holding.
On Wednesday, Motherson Sumi shares rallied more than 7 percent in the morning session, but shed all gains after the announcement of the Peguform deal, falling as much as 7 percent. They ended 3.53 percent lower at 230.85 rupees in a Mumbai market that rose 1 percent overall.
Peguform reported an EBITDA of 66.87 million euros in 2010 on sales of 1.37 billion euros.
"There are concerns that the company they are acquiring has lower margins of only around 5 percent," said a Mumbai-based auto analyst, who declined to be named. Motherson Sumi itself has a much higher EBITDA margin at about 11.5 percent, the analyst added.
The stock has risen more than 31 percent so far in 2011, while the broader market fell more than 10 percent.
"While looking at margins we should look at the synergies. We are already in the business that is generating good return on capital. So margins will be considered only to determine the price," Motherson Sumi Chief Financial Officer G.N Gauba said.