M & A CritiqueIntroduction
Motherson Sumi Systems Limited (MSSL) was established in 1986 as Flagship Company of the Samvardhana Motherson Group. It is a joint venture between Samvardhana Motherson Group and Sumitomo Wiring Systems (Japan). It is listed on the stock exchanges since 1993. MSSL is a focused, dynamic and progressive company providing customers with innovative and value-added products, services and solutions.
MSSL has done 10 acquisitions, the first being in wiring harness in 2002, and other noticeable being acquisition of mirror business from Visiocorp (now renamed as Samvardhana Motherson Reflectec) in 2009 and Peguform (now named Samvardhana Motherson Peguform) in 2011, which established Motherson as a global Tier-1 supplier to the major OEMs of the automotive industry.
The business portfolio comprises electrical distribution systems (wiring harnesses), automotive rearview mirrors, polymer processing, injection moulding tools, elastomer processing, modules and systems, machined metal products, cutting tools, IT services, engineering & design, CAE services, vehicle air conditioning systems, lighting systems, cabins for off-highway vehicles, cutting tools and thin film coating metals. The company also has invested in technologies that provide manufacturing support, including compressors, paint coating equipment, auxiliary equipment for injection moulding machines and automotive manufacturing engineering services.
Motherson Sumi Systems started as a wiring harness company in 1986 by JV with Sumitomo Wiring Systems (Japan). MSSL is the largest manufacturer of automotive wiring harnesses in India, with more than 65% market share in passenger car segment, serving the entire automotive industry.
Acquisition
Motherson Sumi Systems Limited has entered into an agreement to acquire US-based Stoneridge Inc’s wiring harness business for $65.7 million (around Rs 385 crore). The acquired business has a turnover of approx. USD 300 Million.
The acquisition will take place through a wholly-owned subsidiary of Motherson Sumi Systems Limited.
The deal would cover six manufacturing facilities that were located in Portland, Indiana in the US, Chihuahua, Saltillo and Monclova, all in Mexico and an engineering and administrative center in Warren, Ohio, in the US.
Stoneridge Inc’s founded in 1965, is a global designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the commercial vehicle, automotive, agricultural and off-highway vehicle markets. The wiring harness business has a history of 48 years and is a well-established name in the markets it serves. The company operates with a global footprint that includes more than 25 Locations in 15 countries to serve customers wherever they do business around the world.
Stoneridge Inc’s Business Segment
Strategy
The company had recently established wiring harness manufacturing in North America the acquisition will lead to strengthening MSSL presence in North America.
Opportunities for Motherson Sumi Systems Limited
The company will have strong synergies with the proposed business being acquired in terms of customer segments, products, and global operations. With this acquisition, MSSL gets one of the most experienced wiring harness manufacturing operations in the region which would increase their customer reach, and most importantly add very talented team members who can help MSSL to service the customers in these geographies This acquisition further strengthens MSSL presence in North America where it has in recent past, established wiring harness operations.
The acquired business would now have access to the expertise of MSSL in the areas of wire harnesses, wires, wiring harness components including connectors, terminals, protectors, fuse and relay boxes and junction boxes.
Presently the turnover of from wiring business is (75% Approx) after acquisition it is expected to further increase the turnover of the company.
MSSL has not yet commented on the sources of finance for the deal.
Opportunities for Stoneridge Inc’s
With the sale of Wiring Business, the company can now increase their focus and resources on other business segments, which are technology-driven with global applications and offer greater opportunities to provide higher value to shareholders.
Stoneridge’s net cash proceeds from the transaction are expected to be approximate $65.7 million adjusted for net current assets, as defined by the purchase agreement. The proceeds will allow Stoneridge to increase cash deployed for earnings-accretive activities, such as strategic acquisitions, debt repayment, and organic growth initiatives, as well as other corporate purposes.
As a result of the transaction, Stoneridge is updating its earnings guidance. The Company now expects earnings per share for 2014, excluding any gain or loss from the Wiring transaction and any potential refinancing initiative, to be in the range of $0.55 to $0.75 per share, compared with original guidance of $0.80 to $1.00 per share.
The deal will lead to a decrease in turnover of the company as wiring segment is contributing to 30% of the turnover, therefore, there will be a substantial decrease in turnover as well as Earnings per share of the company.
Valuation
Financial Highlights
Stoneridge Inc (In Thousands)
| Particulars | ($) 2013 |
| Net Sales | 9,47,830 |
| Operating Income | 39,704 |
| Equity in earnings of Investee | 476 |
| Net income per diluted share | 0.56 |
| Primary working Capital | 1,62,910 |
| Total Assets | 5,88,322 |
| Cash and cash equivalents | 62,825 |
| Long term debt less current portion | 1,85,045 |
| Total Shareholders’ equity | 1,88,534 |
Wiring Segment (In Thousands)
| Particulars | ($) 2013 |
| Net Sales (Including Inter-segment) | 2,95,937 |
| Income before income taxes | (10,074) |
| Depreciation and Amortization | 4,978 |
| Interest Expense, net: | 250 |
| Capital Expenditures: | 3,768 |
| Total Assets | 98,180 |
With the deal values of $65.7 million MSSL will get the turnover of 300 Million which is 5 times of the deal value with the cash losses of $5 million ($10.07 Mn loss plus Depreciation $4.978 Mn) approx. As the deal is structured through asset purchase; MSSL will pay $65.7 million (Debt Free and Cash Free) to Stoneridge’s for the wiring business which is having an asset value of 98.18 million so almost 33% discount to book value of assets.
Conclusion
The acquisition should help the company, to utilize the benefit of the manufacturing facilities that are located in Portland, Indiana in the US, Chihuahua, Saltillo and Monclova, all in Mexico and an engineering and administrative center in Warren, Ohio, in the US. This addition will further help the company to achieve a strong launch pad for its 2020 targets. The acquisition gives the Company very strong entry into US market both in terms of a number of production locations and synergy with its other products. Discount to the book value of assets reduces capital employed in the business and if it can turn around the company and even generate 10% profit before tax on even present turnover $ 300 million, the payback period is just 2 years. Considering the wide range of products and its management capabilities to absorb and integrate any businesses, it will be able to turnaround the business. Like all other acquisitions, this one also will create substantial value for Motherson Sumi.
