Mahindra Two Wheelers, a part of $16.5 billion Mahindra Group has entered into a binding bid to acquire 51% stake for Rs 216 crore or Euro 28 million in Peugeot Motorcycles, an affiliate of the Euro 54 billion PSA group. The move is seen as an attempt by the Indian company to grow its fledgling two-wheeler business.
The announcement on Tuesday came after several months of negotiation with French carmaker Peugeot.
The funds will be infused subject to "Works Council consultation," as part of the employee dialogue process and after obtaining a green signal from the anti-trust law.
According to senior M&M officials, out of the 28 million Euros, 13 million Euro will be spent on secondary sale of shares from Peugeot of PSA, and 15 million euro through a fresh issue of shares to M&M.
Pawan Goenka, ED, Automotive business at M&M said the legal process will be completed in three months. Once the formalities are completed, the new board will have 3 nominees from Mahindra Two Wheelers and 2 from PSA Group.
Interestingly, the CEO of the Scooter business at Peugeot is Fredric Fabre, who was leading Peugeot's re-entry into India, two years back. Fabre will continue as the CEO of the company.
Goenka says Peugeot is a good fit to Mahindra Two Wheelers. "It is a strong brand, which can sit above Mahindra Scooters. The four areas M&M-Peugeot will work on are building the brand - expedite global expansion, investing in product portfolio and bring together synergies in sourcing and selling," he said.
"We can work together in helping them grow in emerging markets like India, and Africa. We are infusing money so they will have enough headroom to develop new products. They have a very strong technology centre with over 20% of its workforce dedicated for R&D with good styling team, which can have a strong rub-off effect on M&M," Goenka explained.
Goenka believes there is a clear opportunity for both brands to sell outside their home market, which brings in the "scale benefit".
"We are roughly the same size and scale (Euro 99 million), immediately we get to double the scale," added Goenka.
Once the acquisition is completed, the entity will become a debt free company. PMTC (Peugeot Motorcycles) will have the exclusivity of using the brand on their category of products and the 15 million euro infusion will go into financing some of the global expansion projects, which may include investment for setting up of an assembly line in Vietnam for Peugeot. There is very little pension liability in PSA and it has been accounted for in the acquisition cost.
Rajesh Jejurikar, chief executive of Mahindra Two Wheelers said, the two companies will explore sharing of engines and platforms. Both companies will operate as two independent entities and the dealings will be at "arms length."
Peugeot is the 5th largest two wheeler maker in Europe with a market share of 9% and annual volumes of 79,000 units. The stake sale in the loss making two-wheeler business was planned to be restructured as part of PSA Group - 'Back in the race' restructuring strategy.
Peugeot Motorcycles is one of the oldest two-wheeler companies in the world and currently manufactures range of premium scooter with 7 different engine capacities, ranging from 50-400 cc vehicles.
PSA has 300 employees through its JV in China and 500 employees in France. As part of the agreement, M&M will not be doing any restructuring or rationalizing workforce in the next two years.
A decade back, Peugeot sold over 2,00,000 vehicles. The volumes however fell with the decline in European two wheeler market. Peugeot today is heavily focused on Europe, with 75% of its sales coming from Europe. The region however merely makes up for 4% of the global two wheeler market.
The entry into India which accounts for almost 21% of the world two wheeler market is one of the key opportunities for Mahindra-Peugeot.
Jejurikar said M&M would look at positioning Peugeot scooters in the premium end of the market.
"Just like the motorcycle segment, where the premium segment is getting created. We think there is an opportunity for us, to create a premium segment for scooters in the country," added Jejurikar.
Experts say the deal is a good strategic fit for M&M to gain technology and simultaneously expand its global footprint. They were certain it will do very little for its existing domestic business.
"For the price they are paying, it is yet another attractive deal for M&M. But the acquisition may not bring the brand in the strong reckoning in the domestic market, which is fiercely fought. They really need a slew of good products in the mass market to reach a scale to become profitable," said an analyst from an international consultancy firm on condition of anonymity.
As part of the 'Back in the Race' restructuring strategy, PSA Group was rumoured to have been on the look out of selling its scooter business completely, but Goenka said, "M&M did not explore the option of a complete buy-out. We insisted that they remain invested in the company for a certain period of time.
Mahindra Two Wheelers has had a tough ride so far in the domestic market. Having entered the two wheeler space by acquiring Kinetic Motors, Mahindra Two Wheelers has remained a marginal player with a market share of just 1.37% at the end of FY-14 with sales of little over 2 lakh units. The company is already sitting on accumulated losses of over Rs 300-500 crore.
However it is infusing fresh equity to bring in new products and increase sales. The company recently launched a new scooter Gusto to bring in incremental sales and there are more scooters and motorcycles in the pipeline for the company. The acquisition of stake in Peugeot is an attempt by M&M to build its brand equity and gain from technology and market access.