Luxurious Acquisition

The buzz about Mahindra & Mahindra (M&M) bidding to acquire a 50 per cent stake in British luxury carmaker Aston Martin is getting louder. While the street has been getting critical over how the tractor mogul would benefit from acquiring Bond-featured cars and whether it would be in a position to handle an acquisition of this size, there are many positives that cold come M&Ms way in case it succeeds in acquiring the company.

Aston Martin is currently owned by a consortium led by Kuwait-based finance firm Investment Dar. According to reports the total price is unlikely to top GBP 250 million. This translates into approximately Rs 2230 crore.

The consolidated reserves & surplus of M&M are around Rs 16475.69 crore, as at the end of March 2012. In case M&M wins the bid, considering this amount, we think the company would be in a position to handle the acquisition without having to financially leverage its position. However, even if it decides to partly fund the acquisition through debt, it wouldn’t make an extensive difference to the long term debt/equity ratio of the company which stood at 1.13 as at the end of March 2012 (it has a total debt of Rs 18829.49 crore on its books).

There is very little financial information about Aston Martin in the public domain primarily because it is a privately held company. This makes it rather difficult to analyse the impact of this acquisition on M&M’s financials. In 2011, Aston Martin’s revenues increased by 7 per cent to GBP 507 million and its EBITDA declined by 18 per cent to GBP 76.2 million. The company runs on wafer-thin margins. The net profit margin of Aston Martin was 1.60 per cent in 2010, with a net income of GBP 7.6 million and revenues of GBP 474.3 million.

M&M’s gains

• M&M has been long trying to crack the US market and has failed to launch its utility vehicles there after having gone through regulatory and legal hassles. The acquisition would help it gain some advantage towards entering that market.
• M&M is currently present in the farm equipment, passenger cars, utility vehicles, commercial vehicles and two-wheeler segments. This acquisition will help it in obtaining a strong presence in the luxury car market.
• It would add to the consolidated revenues of M&M by almost 50 per cent of its existing sales.
• Aston Martin built 4156 cars in 2010, running below its peak in 2007 where it built 7281 cars thus displaying an upward potential.
• Aston Martin has been a late entrant in the Chinese market and has tremendous potential for growth from emerging markets.

Hurdles M&M would have to face

• The Aston Martin deal with Ford to supply engines was to come to an end in 2012. However, for now the company has exercised an option to extend it for four years, until 2016. This poses a serious need for R&D investments or strategic alliances towards supply of parts.
• M&M would take an additional debt of GBP 300 million which is on Aston Martin’s books into its accounts. This debt has been downgraded by Standard & Poors on account of declining sales in key markets and a weak outlook for 2012. An acquisition would bring the total debt of M&M up to Rs 29300 crore keeping the total/debt quity ratio 1.75.
• On account of lower margins seen by Aston Martin, the deal would be relatively less beneficial to M&M when compared to what happened in case of the JLR – Tata deal, wherein JLR contributed to 51.22 per cent of Tata Motor’s consolidated profits.
• Aston Martin would command heavy investments as peers like BMW and JLR are likely to pump R&D investments up in the coming years.

Out and out, the deal would have a mix of positives and negatives. The actual impact however could be gauged accurately only once the deal comes through and information for Aston Martin is more transparent. Though it looks like there would be some short-medium term pressures added on M&M, the long-term prospects of this deal look bright.