India's Mahindra & Mahindra is planning bid up to $400 million for troubled South Korean automaker Ssangyong Motor, sources said, as it seeks to become a major global utility vehicles maker.
Three sources with knowledge of the matter told Reuters on Thursday that the company, which in 2008 lost out to Tata Motors for Ford Motor Co's luxury brands Jaguar and Land Rover in 2008, is serious about making a competitive bid ahead of next Tuesday's deadline.
We have every intention of making a bid, said a company source, who asked not to be identified because the offer was not yet public.
The company was willing to pay up to $400 million, or maybe more if needed, the sources said.
Mahindra, India's largest utility vehicles maker, is among six bidders shortlisted to make a bid for cash-trapped Ssangyong, which has been under court-led restructuring since early 2009.
Other bidders include Renault-Nissan alliance and Kolkata-based Ruia group.
Renault-Nissan has said its interest in Ssangyong is purely for its plant capacity. Its south Korean car maker Renault-Samsung needs more capacity for Nissan-badged cars that it exports to Russia and the Middle East.
The other Indian bidder, Kolkata-based Ruia, has a track record of buying distressed assets such as Dunlop but its Chairman Pawan K. Ruia has said the group is yet to take a decision on whether to make a bid for Ssangyong.
Indian automakers, despite being part of a market that has grown 30 percent so far this year, are looking for a presence overseas, where car prices and margins are typically higher.
It is inevitable that Indian auto makers should look at overseas acquisitions as this is the fastest way to get a global footprint compared to organic growth which will take a longer time, said Abdul Majeed, leader for auto practice at PricewaterhouseCoopers.
Ssangyong shares ended up 3.9 percent in a slightly weaker Seoul market, while Mahindra shares fell 1.4 percent in a Mumbai market down 0.2 percent.
Ssangyong, which has about 2 percent of the South Korean auto market, exports to Russia, Europe, China, Middle-East, Africa, North and South America and the Asia-Pacific.
Mahindra is scheduled to launch its Scorpio pick-up in the key U.S. market later this year and has also been investing in light and heavy trucks, two-wheelers and electric vehicles.
This deal, if it goes through, will strengthen the company's presence in the (utilities) segment globally, said Umesh Karne, analyst with Brics Securities, adding that it would give it a global reach for its own products as well.
Analysts in South Korea said Ssangyong may help Mahindra develop technology and add line ups.
Ssangyong's technology, especially one on diesel engines, which can meet EURO 4 emission standards, will be attractive to Mahindra, said Michael Sohn, an auto analyst at Woori Investment & Securities in Seoul.
After a dismal 2009, Ssangyong's sales more than trebled in the first seven months of 2009 to 43,811 vehicles while in the first quarter its net loss reduced by more than 90 percent.
I think anything over $400 million would be too expensive, said an investment banker, not involved with the deal but who has worked with Mahindra in the past.
What Mahindra will be getting are a couple of SUVs built on an outdated platform and a car, based on an older version of the Mercedes E-class, he said.
Ssangyong sells the Rexton and Kyron SUVs and Chairman luxury sedan. Its current debt stands at $634 million.
In 2009/10, Mahindra sold 214,128 utility vehicles, up about 40 percent from a year earlier.
Mahindra, which has cash reserves of about 20 billion rupees, has a low debt to equity ratio of 0.4, which gives it the ability to raise funds, analysts said.
In July its chief financial officer had said the company had enough funds for its immediate needs. If a situation arises where we need more, we will have no difficulty raising it, Uday Phadke said.
Ssangyong had a really bad year in 2009, but sales figures in the last few months have shown an improvement, said Preet Mohan Singh, sector head at investment bank Avendus Capital.
So I don't expect too much in 2010 but in 2011, we can look at an operating profit of $200 million on a topline of $2 billion. The critical part is how Mahindra will integrate it, he added.
Mahindra has capital expenditure plans of about 85 billion rupees over the next 3-5 years, with a part of the expenses to be shared by some of its subsidiaries.
(Additional reporting by Chang-Ran Kim in Tokyo & Jong-woo Cheon in Seoul; Editing by Lincoln Feast)