Minda may have its work cut out raising stake in component major Pricol

Whether it was Carborundum Universal’s (CUMI’s) hostile takeover of Wendt India in 1991, India Cements gaining a controlling stake in Raasi in 1998 or the acquisition of Mindtree by L&T in 2019, southern India is not alien to the concept of hostile takeovers.

Over the past three months, a new takeover drama has been unfolding once again in the South, with the management of Coimbatore-based auto component major Pricol and its rival Gurugram-based Minda Corporation at loggerheads over a possible hostile buyout of Pricol by the latter.

The high-voltage battle kicked off on February 17, when Minda Corporation announced the acquisition of a 15.7 per cent stake or 19.1 million shares in Pricol for around Rs 400 crore, at Rs 209 per unit, through an open-market transaction. Following this, Pricol came out in public and said that the company has no information about the deal and Minda is its competitor in one of the major business segments, driver information systems.

The Tamil Nadu-based company’s managing director, Vikram Mohan, said that even if there is an offer “of Rs 1,000 per share”, his company was not up for sale and it was readying a “war chest” to avert any possible hostile takeover bid.

A day later, Minda’s strategy head, Anshul Saxena, told Business Standard that the intent was to become a financial investor; Minda would not be exercising any special rights in Pricol. “After considering various opportunities for the cash that we had, we realised Pricol is the best opportunity for us. Not just what it has delivered in the last four to five years financially, but also its products and the industry is something that we actually understand,” he said.

For those who thought the battle was over, the February episode turned out to be a trailer. On May 2, Minda announced that it is approaching the Competition Commission of India (CCI) to increase its stake in Pricol to 24.5 per cent. On May 17, Pricol informed the stock exchange that it has filed a preliminary objection against Minda’s stake expansion plan. In an earnings call this month, Mohan said that the promoters would take all legal and financial measures against the move.

Adding to the episode, on Wednesday (May 24), Madras High Court accepted a writ petition by Pricol, challenging the Minda application to the CCI for increasing its stake. The court further ordered placing temporary restrictions on the Minda application, reviewed and decided upon by the CCI.

What makes Pricol such an attractive target? It is one of India's leading dashboard manufacturers and also provides driver information systems and sensors, pumps and allied products, telematics and wiping systems. Its customers include almost all leading original equipment manufacturers (OEM) — Bajaj, BMW, Harley Davidson, Hero, Honda, Suzuki, Mahindra, and TVS among others in two- and three-wheelers. In four-wheelers, Maruti Suzuki, Tata Motors, Renault Nissan, Mahindra, Skoda, Mitsubishi and PSA, and in commercial vehicles Tata, Ashok Leyland, Force, Mahindra, Swaraj Mazda, Daimler and VECV are among its clients. It has a strong presence in off-road vehicles and tractors, too.

Minda’s move was seen as an effort to strengthen its presence in the dashboard instruments business. Pricol derives over 80 per cent of its revenues from OEMs, two-wheeler OEMs in particular. In the two-wheeler instrument cluster, Pricol has a market share of around 40 per cent to Minda’s 15 per cent.

Pricol’s revenue from operations increased by 67 per cent from Rs 1,139 crore in FY20 to Rs 1,902.83 crore in FY23, while from a net loss of Rs 212.88 crore (the Covid year), it posted a net profit of Rs 124.7 crore in FY23. Pricol’s shares increased by 18 per cent from Rs 199.25 on February 17 to Rs 234.7 on Wednesday and touched a peak of Rs 250.4 on April 28, after Minda revealed its intentions.

During the same period, Minda’s share price also rose 38 per cent from Rs 203.85 to Rs 280.30. In FY23, Minda’s revenue increased by 45 per cent from Rs 2,976 crore last year to Rs 4,300 crore and its net profit also rose 60 per cent to Rs 219 crore from Rs 137 crore last year.

The question is whether a hostile takeover is realistic. According to industry experts, it may not be a cakewalk for Minda, if the company’s intention is a takeover. “In this case, the promoters hold around 36.53 per cent. That gives them a strong footing. It is not easy to displace a shareholder who has 37 per cent as they can buy up another 3-4 per cent through a creeping acquisition route. Then, it will be almost 40 per cent and sound. It may not be 51 per cent, but they can keep the predator outside,” said Ranganathan V, a former E&Y official and an expert in family businesses.

If Minda has to increase the stake to 24.5 per cent, it needs another 8.8 per cent. Based on the current market cap of Rs 2,822 crore, this can be valued at around Rs 248 crore. Out of Pricol’s public shareholding of 63.47 per cent, Minda’s possible targets for buyouts are likely to be Aditya Birla Sun Life Trustee (2.98 per cent), Quant Mutual Fund (1.97 per cent) and Nomura Singapore (1.04 per cent), which comes to around 5.99 per cent. In addition to these players, PHI Capital Solutions holds 5.73 per cent in Pricol.

If Minda manages to get both, it will be able to increase shares by 11.72 per cent, which may require at least Rs 331 crore for Minda and take it to 27.42 per cent, still short of Pricol promoters’ holdings. Besides, once its shareholding crosses 25 per cent, the company will be able to trigger an open offer. According to media reports, Pricol has shown confidence that institutional investors with around 16 per cent stake are on their side.

“For Minda, the Pricol buyout will come at a very high price and the promoter is also very clear that it has no intentions to sell,” Ranganathan added.

The question is how far Minda will drive itself in its bid to acquire market share.