Mahindra-CIE merger brings raw deal for arm MUSCO

Mahindra?s merger deal with Spanish major CIE seems to have overlooked the interest of shareholders of one of its listed entities ? Mahindra Ugine Steel Company (MUSCO).

MUSCO is one among the three listed companies that will eventually become part of the $3-billion auto component enterprise called Mahindra CIE, to be formed after a complicated in-house merger of Mahindra’s Systech automotive component businesses followed by an acquisition by CIE.

The other two listed entities to be part of this process are Mahindra Forgings and Mahindra Composites.

However, unlike the shareholders of Forgings and Composites, who got an open offer at a high premium as a result of the deal and, hence, an exit opportunity in stocks that have seen tremendous highs and lows, MUSCO shareholders have been denied the opportunity, solely by virtue of the structure of the deal.

While according to the Securities and Exchange Board of India (Sebi) takeover guidelines, there are no loopholes in the deal and CIE can very well bypass an open offer for MUSCO, considering what the shareholders of Forgings and Composites have taken home after the deal, MUSCO investors feel they are left in the lurch, claim some shareholders.

While a mail sent to Mahindra remained unanswered, company sources said the deal will add immense value to all shareholders of Mahindra?s Systech auto component companies once the acquisition process is completely over as the deal catapults Mahindra CIE to the league of top companies in the world.

MUSCO is a metal stamping (a process primarily used to make panels in automobiles) and steel and rings (alloy and specialty long steel products) manufacturing company. It is the biggest company under the Systech arm of Mahindra with a turnover of over R990 crore.

Under the contours of the deal between CIE and Mahindra, Mahindra Forgings had to merge all companies under the Systech auto component arm into itself and then sell a majority stake in Forgings to CIE.

After the acquisition, the new entity will be called Mahindra CIE, where CIE will hold a 51% stake, Mahindra will hold 20%, and the rest will be held by institutional and public shareholders. CIE will be paying $116 million for the deal.

Separately, Mahindra will also pick up a 13.5% stake in CIE for $94.24 million. The deal is cash-neutral for both Mahindra and CIE.

However, while the acquisition of Mahindra’s shareholding by CIE in Composites and Forgings was to be done pre-merger and, hence, an open offer was triggered, in MUSCO, the acquisition will be after the merger, avoiding an open offer.

According to the calculations by research analysts, the valuation that has been used for arriving at the swap ratio of merger of Composites into Forgings (90:100) is in line and fairly co-related with the valuation pegged on the two companies for acquisition by CIE. This valuation has been used to arrive at the open offer price of R74.70 per share for Composites and and R81 per share for Forgings. This is a premium of 114.28% and 24.62%, respectively, for the shareholders of both the companies, according to the date of announcement of an open offer.

If an open offer would have been made for MUSCO as well, then, in co-relation with the swap ratio between MUSCO and Forgings of 274:100, the open offer price would have been R221.94 per share, a premium of 87% approximately, which they never got an opportunity to avail themselves of.