Maruti to buy Suzuki plant in Gujarat with shares, not cash

The issuance of new shares will lead to an equity dilution of around 4% in MSIL, and increase Suzuki’s ownership in the New Delhi-based carmaker by 1.8% to 58.28%, based on the current market price and Suzuki Motor Gujarat (SMG) plant’s book value of ₹12,755 crore.

Consequently, the unit will become a wholly-owned subsidiary of Maruti Suzuki, and its key management positions, some of which are currently held by Suzuki employees from Japan, will be taken over by the Indian team.

With this deal, Maruti Suzuki will aim to enhance its operational and organizational efficiencies, and double its manufacturing capacity by consolidating production within a single management entity.

According to Maruti, the share swap approach will minimize adverse effects on earnings per share (EPS) and profits compared to a cash transaction, as it would have resulted in a loss of interest income.

To be sure, Maruti currently has cash reserves of about ₹46,800 crore.

The proposal for allotting preferential shares to the Japanese parent will be put to a vote before Maruti’s minority shareholders at an extraordinary general meeting (EGM) in the future, the company said in a regulatory filing.

Under a share-swap scenario, MSIL estimates a higher net profit each year until 2030-31, to over ₹1,400 crore at the end of 2030. Besides, it also expects higher earnings per share and dividend payouts with the share swap arrangement, relative to a cash buyout.

The calculations are based on assumption of 12.5% cumulative profit growth over the next decade, coupled with a 7% interest income. Suzuki has so far invested close to ₹18,000 crore in the Gujarat factory that can produce up to 750,000 cars per year.

SMG’s contract manufacturing arrangement with Maruti operates on a no-profit, no-loss basis. On 1 August, Maruti announced its intention to terminate this arrangement, and secure full ownership of its contract manufacturing partner.

The deal with Suzuki is likely to be completed by 31 March. “A quarter of MSIL’s production is managed by SMG, which could cause complications in our management structure, going forward. Both SMC as well as MSIL agreed it is best if both production and production-related activities are brought under a single company," R.C. Bhargava, chairman, Maruti Suzuki India, said at the time.

“In 2015, our shareholders had accepted (the option of SMC building the Gujarat factory) because it was clear that it would be of financial benefit to us. Besides the financial benefits, we had ₹5000-6000 crore extra profit because we didn’t invest our cash. We got the time to build our own strength and our own organization because Suzuki did the work of erecting and commissioning the projects and running the plants and bringing in the kind of technology we needed. Now, we have reached a stage where we are a very different company. We are already at 2 million cars in annual production capacity. We are moving towards 4 million cars. We have multiple technologies to handle today... and many more different models to handle. We have electric vehicles, cars, and sport utility vehicles. We will have a much larger number of models by the time we get to 2030," he added.

“There is no single company under a single management that handles 4 million cars in the world. We have to reorganize Maruti to deal with the requirements of the management and technologies, which are to be faced in the next 10 years. It’s not possible to efficiently work the whole system, and efficiently organize production, supply chain and everything, if one part of our production facilities are with a different company. So, in order to facilitate our ability to reorganize everything in a manner that leads to smooth and efficient working in future years, we decided to merge SMG with us. The reason behind preferential allotment of shares was chosen as a method of acquisition as it will be far better for our shareholders," Bhargava said.

Analysts tracking Maruti Suzuki said the 4% dilution in equity isn’t significant and the impact on the company’s share price since the announcement (down 2% in five days) has been fractional because the deal at book value ensures a fair transaction for all the minority shareholders.