Is Maruti ideally placed to take over parent?
May 20 2016
Indian subsidiary has long outgrown Suzuki Motor Corp and is perfectly set up for a reverse merger
Shares in the Japanese automaker slumped as much as 15 per cent Wednesday after it admitted problems in the way it tested the fuel efficiency of 2.1 million vehicles. They rebounded almost 8 per cent on Thursday before giving up some of the gains, but the question remains: Who would be Suzuki's white knight, should it need one?
The best candidate might be found 3,500 miles away, in New Delhi. As Gadfly pointed out last year, Suzuki's 56 per cent-owned Indian subsidiary Maruti Suzuki has long outgrown its parent company and is perfectly set up for a reverse merger.
Maruti Suzuki controls nearly half of an auto market that's set to be the world's third-biggest by 2020. Even after a 15 per cent share slide in 2016, its enterprise value still stands at 12.4 times forward 12-month Ebitda, versus a 3.4 multiple at Suzuki.
A takeover by Maruti Suzuki would put a seal on changes the Japanese parent has already been working on. Suzuki has the largest exposure to emerging markets among its compatriots, and those Maruti-run factories help keep its costs down, too. Nearly half of Suzuki's auto production is now in India, an advantage that's only likely to sharpen over the coming years as a stronger yen adds pressure to homegrown production lines and its 1.5 million-vehicles-a-year Gujarat plant starts ramping up.
Bloomberg's merger calculator suggests a tie-up could have advantages, even with no synergies. Using an all-scrip offer that would allow Suzuki's shareholders to benefit from any upside, Maruti Suzuki could offer a premium of 25 per cent over Suzuki's Tuesday closing share price and still come out with a 10 per cent earnings accretion this calendar year.
A deal would probably have to be a bit more complicated than that. Indian companies haven't really managed to use their shares as acquisition currency overseas because the rupee isn't fully convertible. Suzuki investors might also balk if their yen-denominated equity is replaced by stock in a volatile emerging-market currency.
A dual listing solves that problem, giving both sets of shareholders proportional stakes in an unlisted joint venture holding all the assets. Such structures are unusual, but surprisingly robust: Royal Dutch Shell has been around since 1903. Regulatory concerns in India ultimately thwarted Bharti Airtel's attempt to to set up a dual listing with South Africa's MTN Group, but that was nearly seven years ago under a less business-friendly government.
A combined group would have several attractions. In the event the fuel-testing scandal results in one-off costs at Suzuki or causes its sales to dip, Maruti's shareholders will probably have their parent company holding out the begging bowl for cash infusions. A merger would ensure they at least get some control in return for those funds.
Many Indian shareholders already feel the alliance is tilted against them. Proxy adviser Institutional Investor Advisory Services has grumbled about royalty payments to Suzuki being too high , and investors including HDFC Asset Management and Franklin Templeton complained last year that Suzuki's wholly owned Gujarat factory would turn Maruti “into a shell company.''
At the same time, a weakened Suzuki isn't in the Indian company's interests. Maruti's shareholders need the parent to invest heavily in assets like the Gujarat plant and keep spending money on R&D if they want to maintain their dominance of the local market. A merger would keep the best aspects of the current relationship, while placating minority shareholders.
Suzuki, for its part, would gain access to all of Maruti's cash flows, rather than just the dividends and royalties it receives at present.
The Nissan-Mitsubishi Motors combination has illustrated size is everything when it comes to weathering potentially expensive automotive scandals. Under a full union, Suzuki could further shrink those costly Japanese operations and build a tighter focus on the faster-growing emerging markets business.
So much for what ought to happen. The main hurdle to this sort of transaction is probably not financial, but personal.
Suzuki's 86-year-old chairman and chief executive officer Osamu Suzuki is married to the granddaughter of Michio Suzuki, who founded Suzuki Motor’s predecessor company, and his son Toshihiro is president and chief operating officer. That's led to sometimes-prickly relationships with outsiders: Even setting aside the tension with Maruti's minorities, it's just eight months since Suzuki ended an acrimonious five-year partnership with Volkswagen by buying back the German carmaker's 20 percent stake.
Maruti's board doesn't seem well-suited to the task, either. Seven out of 12 directors are Japanese. Chairman Ravindra Bhargava, a few weeks shy of his 82nd birthday, has had a close and apparently affectionate working relationship with Osamu Suzuki for more than three decades.
Still, if the companies' boards were focused on putting shareholder interests first, they could do worse than consider a backwards Indian takeover. When your car's stuck, sometimes sticking it in reverse is the best way to scoot.