Motherson Sumi plays M&A game again, PKC buy is earnings-accretive

PKC buy will boost revenues by 17% in initial year

Motherson Sumi has perhaps mastered the art of acquisitions. In the past, the Street has seen how it has turned around loss-making companies. Analysts have little doubt that it’s latest shopping, PKC, will be a hit.

The numbers also instil confidence, and suggest that Motherson will benefit from the deal, financially as well as in achieving its long-term goals.

PKC is a listed company, headquartered in Finland. It specialises in wiring harness for commercial vehicles and has a strong foothold in North America and Europe. 

The best feature about PKC is that it closed FY15 with revenues of 908 million euros (Rs 6,580 crore; at a current value of Rs 72.5 a euro) and has managed annual compounded revenue growth of about 20 per cent in 2010-15.

After two years of losses, it turned profitable (14 million euros) in FY15.

That its margins have steadily increased from 3.2 per cent in FY14 to 7.1 per cent in FY15 adds assurance to investors that Motherson has got the right candidate.

With the outlook for commercial vehicles improving, analysts expect PKC to become stronger. Therefore, the acquisition will be earnings-accretive from day one and is likely to boost Motherson’s revenue by 17 per cent in the initial year, on available date.

PKC’s product profiling is also interesting. As it focuses on wiring harness for commercial vehicles, the acquisition will strengthen Motherson’s footprints in the US and Europe. Motherson currently has strong presence in the passenger vehicles segment. Therefore, concerns on product or territory overlapping due to the acquisition are irrelevant. 

The all-cash acquisition will see Motherson paying 571 million euros (Rs 4,150 crore) or 23.55 euros a share to PKC’s shareholders. While price per share is at 51 per cent premium to PKC’s pre-deal price, analysts say the valuations are reasonable, given the synergies from the deal.

Much of the purchase consideration is expected to be paid through Motherson’s recent qualified institutional placement, where it raised Rs 1,993 crore in September 2016. Cash balance of Rs 5,943 crore as on September 30, 2016, will also come handy.

Motherson is sufficiently funded for the deal and its management says there is more room for acquisitions.

Borrowings as on September 30, were at Rs 7,328 crore and its debt-equity ratio maintained at 0.6 leaves sufficient room to raise more debt.

In short, the PKC acquisition is termed as a win-win for Motherson.