Motherson Sumi has announced the 100% acquisition of the share capital of PKC Group Plc Finland for 571 million euros. This will be via an open tender offer of Euro 23.55/share, at a 51% premium to PKC’s closing price of Euro 15.59 on 19 Jan 2017, and the transaction is expected to close by March 2017 end. The acquisition will be made through a 100% subsidiary of MSSL, to be set up for the purpose, and subject to the completion of closing conditions and necessary regulatory approvals.
As of 2016-end, PKC had revenues of Euro 846 million, Ebitda margins of 7.6% and net debt of Euro 47 million, implying a valuation of 9.7x EV/Ebitda and 0.7x EV/sales. This is high compared with its past acquisitions of SMR (~1.6x EV/Ebitda) and SMP (~5x EV/Ebitda), given that it is a profitable company.
However, we note that PKC management expects a significant jump in profitability over the next two years and targets Euro 1.4 billion in revenues, >10% Ebitda margins by 2018. This implies ~4.4 EV/Ebitda, 0.4x EV/sales for MSS on FY19F, which looks reasonable. We believe this acquisition can be EPS-accretive by ~5-7% by FY19, if current targets are achieved. However, MSS management expects it to be EPS-accretive in the first year itself. Given management’s record, we believe there can be further upside from expanding the addressable market, MSS’s record on improving profitability/ROCE and other synergy benefits in product cross-selling by other group companies.
Management remains confident of the business potential and value accretion from this acquisition, and maintains key principles of acquisition will not be compromised to achieve FY20 targets.
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Key rationale for acquisition
PKC is a key wiring harness supplier to the heavy and medium-duty commercial vehicle segment (~62%/43% market in NA and Europe HD). PKC brings with it a complementary geography and product profile, which are in line with MSS’s stated intentions of expanding in these areas. Currently, PKC has minimal overlap with MSS’s existing businesses. MSS turned around Stoneridge wiring business acquisition in eight months. Thus, it remains confident of improving profitability of PKC, based on its past experience. ~54% of PKC’s 9MCY16 revenues come from North America and ~36% from Europe, the key focus areas of MSS. This will also help MSS expand PKC’s expertise in the CV segment in Asia Pacific region (~Euro 1 billion opportunity).
We note PKC would add $1.5 bn of revenues to MSS’s consolidated revenues by FY20, and is on track to achieving MSS’s target of adding ~$ 6 bn revenues from acquisitions by FY20. However, we believe a key positive of the PKC acquisition is timing, as the North America and Brazil truck industries are bottoming out. We maintain our Buy and TP on MSS.
About PKC: Headquartered in Finland, PKC is a global Tier 1 supplier of wiring harnesses and associated components. In addition, it designs and manufactures electrical cabinets, power packs and electrical distribution systems for rolling stock manufacturers. It also has a significant presence in Brazil and China. It has production facilities on four continents, with over 22,000 employees.