M&M takes a gamble for a touch of style

Pininfarina's designs are a runaway success in India, but its loss-making history could prove a challenge for its new owners

Much before automobile maker Mahindra & Mahindra and its information technology services company Tech Mahindra signed on the dotted line to buy a controlling stake in Pininfarina, they had tested the Italian company's capabilities. "Pininfarina worked extensively on the TUV3OO. We were impressed by their work and that is when we decided to pursue the deal with them," Pawan Goenka, executive director, M&M, said at the recent unveiling of the KUV1OO, a compact sports utility vehicle to be launched on January 15.

The TUV3OO is a compact sports utility vehicle with an unmistakably Mahindra design. The sharp-edged, boxy SUV is already a runaway hit and M&M has increased production by 50 per cent to 6,000 vehicles a month. This confidence in the Italian company's design strength led M&M and Tech Mahindra to form a special purpose vehicle to acquire a 76 per cent stake in the indebted Pininfarina this December.

Tech Mahindra, India's fifth largest IT services company, will own 60 per cent in the special purpose vehicle and M&M the rest. The companies will pay euro 25.3 million (Rs 186 crore) to buy out Pininfarina's promoter Pincar, in the ratio of the stakes held by them in the special purpose vehicle. The special purpose vehicle will make an open offer of euro 20 million (Rs 147 crore) to the shareholders of Pininfarina to acquire the balance stake.

The buy-out of the 85-year-old firm, which has designed models for Ferrari, Alfa Romeo, BMW and Maserati, will offer Tech Mahindra an opportunity to strengthen its engineering services business and provide M&M access to automobile design. Tech Mahindra will also benefit from Pininfarina's presence in Italy and Germany, hotbeds of European automotive manufacturing, as well as in the US and China. "Pininfarina will significantly enhance the design capabilities of the entire Mahindra group. Adding Pininfarina's legendary design skills to our integrated engineering solutions enables a strong entry into automotive styling, design and development, and reinforces our body engineering capabilities," Anand Mahindra, chairman of the Mahindra Group, says.

New horizons
Why was Tech Mahindra brought in? M&M aims to strengthen Tech Mahindra and make it a one-stop engineering services and design company that can undertake vehicle design and development assignments for automobile companies. Two years ago, Tech Mahindra merged with itself Mahindra Engineering Services, the global engineering consultant and service provider catering to the automotive, aerospace and defence industries. Mahindra Engineering Services belonged to Mahindra Systech, the umbrella organisation that housed all automobile components companies of the group. In September this year, Tech Mahindra had with Ericsson, EBS and TomTom come up with connected car solutions.

Further, if M&M had bought Pininfarina alone, the Italian company's other clients (Ferrari, Alfa Romeo, BMW and Maserati) would not have liked it as they would have been uncomfortable with M&M getting unfettered access to their cars' designs. The minority stake allows M&M access to Pininfarina's designs while keeping an arm's length with its businesses.

Pininfarina's financial health
It was the Italian company that seemed more in need of support. Pininfarina has not posted profits over the past decade and its debts have mounted. For the nine months ended September Pininfarina's loss expanded to euro 8.4 million (Rs 62 crore) from euro 1.1 million (Rs 8.08 crore). Its net debt declined slightly to euro 47.3 million (Rs 347 crore) from euro 49.8 million (Rs 366 crore), according to company disclosures.

M&M bought Pininfarina at euro 1.1 a share, at a discount of 74 per cent to its euro 4.2 closing price on the Milan Stock Exchange on the day the deal was signed. The deal could have been sweeter had Pininfarina's creditors not had their say. Three or four banks had rejected Mahindra's preliminary offer because it envisaged writing off half of Pininfarina's debts of euro 87 million, Italian newspaper Il Messaggero reported.

Shares of M&M traded flat on the Bombay Stock Exchange a day after the deal was announced while Tech Mahindra closed 3 per cent down. Though the analyst community welcome the deal for M&M, they question Pininfarina's loss-making past. Angel Broking believes the deal will not affect M&M's finances. "The deal is unlikely to impact M&M financially, given its size and the balance sheet of M&M (which has in excess of Rs 2,000 crore cash). The deal will help M&M in the long run as it will enhance the design capabilities of the company," said the brokerage house in a research note. However, turning around a company that has been making losses for several years may be difficult, feel analysts. Pininfarina's employee strength is down to 650 from a peak of 2,800 in 2006.

"With the street expecting a margin expansion based on the management commentary, this acquisition will disappoint, at least on the margin front, in the near term," says Girish Pai of Nirmal Bang Securities.

However, buying distressed companies has become a bit of a habit for M&M. Over the last few years, the group has pursued loss-making companies to buy them cheap and turn them around with frugal management and sound financial backing. M&M bought the troubled Punjab Tractors in 2007 to strengthen its hold on the local tractor market. Today, two in every five tractors sold in the country are either a Mahindra tractor or a Swaraj tractor (formerly owned by Punjab Tractors).

In late 2010, M&M bought a controlling stake in South Korea's SsangYong Motor Company, which like M&M, is a leader in SUVs. Just a year earlier, SsangYong had filed for bankruptcy protection as it faced crippling strikes. Since then SsangYong and M&M have forged several synergies in vehicle and engine development. It almost reported a profit last year, but a court ruling on wages dampened margins.

Not all M&M purchases have been this successful though. The purchase of the business assets of Kinetic Motor Company in 2008, with which M&M marked its entry into the competitive two-wheeler segment, is still riddled with losses. M&M had also bought a controlling stake in the Bengaluru-based Reva Electric Car Company for electric vehicle technology. With uncertainty over hydrocarbon fuel pricing, sales of Reva cars have been less than expected. Likewise, joint ventures with French carmaker Renault and US-based truck maker Navistar have not worked. M&M had to buy out its partners in both ventures and is struggling to raise sales.