M&M Signs Definitive Agreement with SsangYong

Mahindra and Mahindra (M&M) and SsangYong Motors have announced that they have today signed a definitive agreement, according to which the former will acquire a 70% stake in the latter. The agreement was signed by Yooil Lee and Youngtae Park, joint receivers of SsangYong, and Pawan Goenka, president of M&M's automotive unit. The two companies said in a joint press release that the total cost of acquisition is US$463 million, split between US$378 million in new stock and US$85 million in corporate bonds. The definitive agreement includes information related to securing outside investment, the establishment of principal management, repayment of rehabilitation claims to protect the interests of creditors, and re-establishing SsangYong's brand presence in the South Korean and global market. M&M has already deposited 10% of the acquisition price as per the terms of the definitive agreement, with the remainder to be paid three days before SsangYong's stakeholders' meeting, scheduled for January 2011. The deal is expected to be concluded by the end of March next year following the completion of all the acquisition procedures and the repayment of rehabilitation claims.

Both M&M and SsangYong are looking forward to the deal. Yooil Lee, one of the court-appointed managers of SsangYong, said that, "The securing of a solid partner who has both financial capability and is engaged in diverse markets will allow Ssangyong to emerge as a global SUV player through the strengthening of R&D, investments in product development, better business competitiveness and global sales expansion." M&M's Goenka meanwhile said, "The coming together of Mahindra and SsangYong will result in a competitive global UV [utility vehicle] player. Together with its financial capability, Mahindra offers competence in sourcing and marketing strategy while Ssangyong has strong capabilities in technology. We are committed to leverage the combined synergies by investing in a new Ssangyong product portfolio to gain momentum in global markets", adding, "There is also an opportunity to introduce a premium portfolio of SUVs [sport utility vehicles] in the Indian market, providing a new growth avenue for Ssangyong and further strengthen[ing] our dominant position in the UV segment."

Outlook and Implications

M&M recently secured approval from the South Korean Fair Trade Commission to acquire a majority stake in SsangYong (see India - South Korea: 22 November 2010: M&M Likely to Sign Final Contract with SsangYong Tomorrow). Although M&M and SsangYong have revealed the broad outlines of the deal and its prospects going forward, the former has yet to detail its plans to finance the acquisition. Earlier this year, it was reported that M&M would fund the acquisition through a combination of debt and internal accruals and it was reportedly planning to raise around US$250 million through debt (see India - South Korea: 8 September 2010: M&M May Raise Around US$250 Mil. Through Debt to Finance SsangYong Acquisition—Report). Goenka said that, "Our debt-equity ratio is also fairly low, so we can raise debt...our debt-equity ratio is around 0.3 and we can go up to 0.6–0.7." There have also been reports that M&M could ask some global private equity (PE) firms to participate in the funding of the acquisition.

The deal will benefit the two companies almost equally. M&M will gain access to new markets, such as Western Europe, Russia, and South-East Asia, where it currently has a limited or no presence. It will also help M&M expand in the United States with its range of pick-ups and SUVs after it recently secured approval from the U.S. Environmental Protection Agency (EPA) to sell its vehicles in the country. It will also have a broad portfolio of SUVs with the addition of SsangYong's Actyon and Rexton, alongside its own range: the Scorpio, Bolero, and Xylo. Furthermore, it will acquire some much-needed up-to-date technology, particularly diesel engines that can meet Euro IV emission standards. The deal will also result in cost synergies in the medium to long term as M&M and SsangYong will look at sharing vehicle platforms. However, M&M has confirmed that it will continue operating the South Korean company as an independent unit, primarily under South Korean management, after the acquisition. Meanwhile, SsangYong—which has been under a court-led restructuring since early last year after Chinese automaker Shanghai Automotive Industry Corporation (SAIC) withdrew its stake in the company—will finally secure much-needed funds to steer itself back on track with the launch of its fuel-efficient models onto the domestic market (see South Korea: 15 September 2010: SsangYong Ships First Batch of Korando C SUV). The company will also secure access to the fast-growing Indian UV market with the launch of its bespoke Korando C/C200 compact SUV (see India: 22 November 2010: M&M Plans to Launch Seven New Models in India Within Next 18 Months). SsangYong is now updating its corporate rehabilitation plan by creating new schedules for the repayment of its liabilities. The company should be able to resume its operations independently during January if it secures the necessary approval from its creditors and the court for its new repayment plan.

However, M&M could face some problems in the short to medium term as SsangYong, like the other South Korean automakers, has a history of disputes with its militant labour union. In addition, it has an ageing product mix that includes "gas-guzzling" SUVs and a lacklustre brand name that lacks an international presence. M&M will also need to invest heavily in the makeover of SsangYong's facilities as they are reportedly almost decrepit. To avoid clashes with the labour union following the integration, M&M and SsangYong have also signed a tripartite agreement with the latter's union, which includes provisions for employment protection, long-term investment, and a commitment to avoid disputes.