Aurum Deal of the Month – February 2017

Indian Auto component major Motherson Sumi Systems Limited (MSSL) is acquiring the entire outstanding share capital and voting rights of PKC Group Plc (a Finland based global Tier-1 supplier of wiring harness to OEMs in the Heavy & Medium Duty Commercial Vehicles segment).

Equity Value: EUR 571 mn (~INR 4,100 crore)
EV/ EBITDA (2016): 9.6x

The Transaction

On the 19th of January 2017, MSSL and PKC entered into a combination agreement for the proposed transaction. MSSL will make a voluntary, recommended public tender offer to acquire the 100% outstanding shares and option rights in PKC. The shares of PKC are currently listed on the Nasdaq Helsinki stock exchange. PKC shareholders are being offered a cash consideration of EUR23.55 for each PKC share/options representing an aggregate equity purchase price of approximately EUR 571mn. The Board of Directors of PKC has unanimously decided to recommend its shareholders to accept the offer.

The acquisition will be made through a 100% subsidiary (direct or indirect) of MSSL, to be setup for the purpose. The deal is expected to be funded by MSSL’s recently issued QIP proceeds, cash on books and existing lines of credit. The transaction is subject to the completion of closing conditions and receipt of necessary regulatory approvals and expected to be completed by the end of March 2017.

About PKC Group

PKC designs, manufactures and integrates tailored electrical distribution systems and related architecture components, vehicle electronics, wires and cables especially for trucks and buses, light and recreational vehicles, construction equipment and agricultural and forestry equipment. PKC has a market-leading presence in the wiring harnesses for commercial vehicles in the North American and European markets. PKC has a 62% market share in heavy duty trucks and 31% share in light duty trucks in the US. In Europe, it has 43% share in heavy duty trucks and 23% share in light duty trucks.

Apart from these geographies, PKC has a significant presence in Brazil and a growing presence in China. It has production facilities in Brazil, China, Estonia, Finland, Germany, Lithuania, Mexico, Poland, Russia, Serbia and USA with over 22,000 employees. PKC clocked a revenue of EUR~846mn and EBITDA of EUR~64 mn (EBITDA margin of 7.6%) for the year 2016. Over 90% of PKC’s revenues come from North American and Europe.

aurum deal of the month feb 2017

Deal Rationale for MSSL

A. PKC a good fit with MSSL: There is minimal overlap between existing operations of PKC and MSSL in terms of geographical presence. While PKC has strong presence in North America and Europe, MSSL has a formidable presence in Asia Pacific. Also, there is minimal customer overlap in the US between PKC and MSS Wiring Systems Inc. Motherson Sumi has been largely dependent on the passenger vehicles segment. Only a small part of the existing business (~5% of consolidated revenues) ‒ wiring harness primarily for buses in UK and for off-highway vehicles in North America (through wiring harness business of Stoneridge) ‒ is not targeted towards passenger vehicles. This acquisition will further diversify and will likely increase the share of the non-passenger vehicle business.

B. Strong opportunity in the truck wiring business: With driver shortages and increasingly stringent regulations on driver safety in North America, truck manufacturers are incentivised to use more electronic and assisted driving content to make driving comfortable and avoid accidents. This is resulting in higher content of electronics and wiring harness in trucks, thus leading to stronger content-driven revenue growth for players in the segment.

C. Opportunity for cross-selling: MSSL is already manufacturing cabin interiors for truck manufacturers in India. It has global facilities that are engaged in manufacturing interiors for cars in which the company has developed expertise and surplus capacity. With access to new truck segment customers of PKC, the company can potentially cross-sell these products and generate higher asset intensity, resulting in improved ROCE. In particular, there could be significant potential in interior systems (cockpits) and bumpers within the Commercial Vehicles space.

D. Acquisition in-line with MSSL’s Vision 2020: MSSL has a vision of reaching consolidated revenue of USD 18 bn by FY20 with a consolidated group ROCE of 40%. MSSL had a consolidated turnover of USD 5.7 bn in FY16. PKC is expected to contribute EUR~900 mn (USD 960 mn) to the topline of Samvardhana Motherson Group from FY18. Though current ROCE for PKC is in single digits, management of MSSL is confident of improving the ROCE of PKC to 30-40% in the coming years with improvement in EBITDA and reduction in working capital.

Conclusion

Supported with an aggressive inorganic growth plan, Motherson Sumi has emerged as the largest auto component maker in India, growing at a CAGR of over 40% in last 10 years. MSSL has undertaken 15 global acquisitions over last 15 years with 4 of them in the wiring harness segment.

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Motherson Sumi historically has a track record of picking up distressed assets which come at cheap valuations. and turning them. The two notable ones are Peguform (now SMP) and Visiocorp rear view mirror business (now SMR), both of which were taken from near bankruptcy to respectable levels of profitability.

However, there appears to be a paradigm shift in the acquisition philosophy of MSSL with the acquisition of PKC. The proposed transaction values PKC at 9.6x EV/EBITDA on 2016 EBITDA and 7.4x EV/ EBITDA on 2017E EBITDA (Bloomberg estimates). Compared to some of the notable peers in auto component supplier space in Europe and US and also past acquisitions done by MSSL, the acquisition appears expensive. The share price offer of EU R23.55 for each PKC share/options represents a 50% premium over the closing price on 19 January and a 53% premium to the 3-month volume weighted average price. But despite the premium being paid, PKC is an accretive acquisition given the margin turnaround potential and its complementary nature of products and geographical presence with MSSL.

Disclaimer: Aurum Equity Partners LLP was not a part of this deal in any way.