(14th May 2002)
GOVERNMENT OF INDIA
MINISTRY OF DISINVESTMENT
1. Government today approved disinvestment in Maruti Udyog Limited (MUL) through a two-stage process :
(i) a rights issue by MUL in the first phase of Rs.400 crores with Government renouncing its rights share to Suzuki. Suzuki would gain majority control and pay Rs 1000 crores to Government as control premium.
(ii) sale of its existing shares through a public issue in the second phase ; the issue to be underwritten by Suzuki.
HIGHLIGHTS OF THE AGREEMENT REACHED
2. The highlights of the agreement reached between the Negotiating Teams of GOI and SUZUKI are summarised below:-
i. The total value of the rights issue would be Rs. 400 crores.
ii The rights issue price would be Rs. 3280 per share. Thus, the rights issue would be for a total of 12,19,512 shares of Rs. 100 each.
iii The fair value for the purpose of working out renunciation premium would be the average of the 3 values indicated above i.e. Rs. 3280 per share.
iv GOI will renounce the whole of its rights share of 6,06,585 shares and SUZUKI will subscribe to the whole of the rights shares so renounced by GOI at the fair market value.
v. SUZUKI would through this method and those spelt out below enhance the value of MUL and Suzuki will pay a control premium of Rs.1000 crores to GOI without GOI parting with a single of its shares in MUL.
vi. SUZUKI and GOI have agreed to enter into a Revised Joint Venture Agreement (JVA). The Revised JVA shall constitute the entire agreement between GOI, SUZUKI and MUL with respect of the subject matter of the Revised JVA and any prior understanding and agreements between the Parties with respect to such subject matter shall be superseded.
vii. Suitable amendments in the Memorandum and Articles of Association of MUL would be carried out to bring them in line with the decisions recorded above and also to enable the listing of MUL shares on the stock exchange.
viii The Revised JVA envisages that GOI would sell its existing shares in the domestic market with participation of Indian and Global investors as permitted by law after the completion of the rights issue transaction.
ix. SUZUKI has agreed to underwrite the first public issue of approximately 36 lakh shares held by GOI at a price of Rs.2300 per share. For the balance shares, GOI has a ‘put’ option at a discount of 15% and/or 10% of average market price. GOI always has a ‘put’ option upto 30th April,2004 at the book value now (Rs.2000) or then, whichever is higher.
3. Since the rights issue will be of a size of 12,19,512 shares, the relative shareholding of SUZUKI and GOI after completion of the rights issue would be 54.20% and 45.54% respectively.
4. The price per share that emerges now is Rs. 3684, which should be compared to the value per share that would be arrived at if the formula agreed to between SUZUKI and GOI in the 1992 agreement were to be used. Using that formula the price per share works out to Rs 1153 based on the provisional figures for the latest year i.e. 2001-02.
ACHIEVED IN CONSTRAINTS
5. Because of the earlier agreement, GOI’s negotiating position has all along been highly disadvantageous because of the following constraints:-
(i) The clause in the existing agreement that SUZUKI’s consent is required for GOI to transfer its share
In the earlier transactions with SUZUKI in 1982 and 1992, when SUZUKI’s shareholding was allowed to be increased (vis a vis GOI), first from 26% to 40% and then from 40% to 50%, no control premium had been paid by SUZUKI, though control had passed to them. As a matter of fact, Government received no payment at this stage as shareholding was allowed to be increased by issuance of new shares to MUL. Exit options were also not built in.
(iii) The pricing formula in 1992 also yielded a low price per share of Rs.269 at which the transaction was done.
(iv) Using the same formulae of 1992 now, the price per share would be Rs.1153 as stated above. As against this, the current transaction would be at a minimum of Rs.3684 assuming undertaking at Rs.2300.
(v) If we examine the rights issue alone, the new shares are being allotted to SUZUKI at Rs.3280 against Rs. 269 in the last transaction(equivalent value Rs.1153). Also, against ‘nil’ control premium last time, the GOI is being paid Rs.1000 crore as control premium.
(vi) SUZUKI already has 50% control in the company and GOI in a minority position at 49.74%.
(vii) An atmosphere of distrust between the two sides, due to the previous arbitration case being contested by both sides during 1997.
6. SUZUKI’s initial offer was of Rs. 170 crores as control premium, which was increased to Rs. 286 crores after considerable negotiations. Thereafter, it took the negotiating team over a month to negotiate a sum of Rs. 1000 crores presently offered by SUZUKI.
7. Similarly, initially SUZUKI was totally reluctant to incorporate any underwriting of the public issue by GOI shares. SUZUKI has now agreed to underwrite the public issue of the 36,12,169 existing shares at Rs. 2300 per share and the balance 29,68,012 at a minimum of the present book value of about Rs. 2000 per share. Once MUL is listed, and when GOI goes for a public issue with full backing of SUZUKI, the share prices are likely to be above the book value. This would mean higher receipts to GOI.
ANALYSIS OF THE DEAL
8. The MUL disinvestment is unique in nature compared to the other strategic sale transactions completed so far such as VSNL, BALCO, HZL, CMC, etc. Therefore, this transaction would have to be judged using different methods as discussed below.
9. Comparison with other disinvestment cases: Since MUL is not a listed company, both sides had agreed to determine the fair value of MUL shares through valuation by three independent valuers. This average value worked out to Rs. 3280 per share. Therefore, the value of Government’s existing 65,80,181 shares works out to approximately Rs. 2158 crores based on this fair value. What Government is receiving from SUZUKI now is Rs. 1000 crores as control premium and considering the undertaking at Rs. 2300 per share for the 36 lakh shares and Rs.2000 per share for the balance approximately 29 lakh shares, it would be an additional amount of Rs. 1424 crores for the existing shares. If the existing shares could be sold at more than the present book value, GOI’s receipt would further go up. Thus, the GOI will at a minimum get out of the transaction of handing over the control and selling its existing shares Rs. 2424 crores, which is Rs. 266 crores above the fair value of Rs.2158 crores mentioned above. If we compare this with similar figures of earlier transactions it would be seen that the present transaction is even better than what has been possible in them.
10. SUZUKI already has 50% shares in MUL and control and management rights which were more than equal as per earlier agreements. This was due to their being technology suppliers. In other cases of disinvestment the strategic partner does not have any control before acquiring GOI shares but acquires control only after the strategic sale. Thus, the control premium presently offered by SUZUKI should be viewed in this background.
11. Annual Cash inflows to Government : Currently, GOI receives dividend on its shareholding. The dividend received by GOI in the past several years has been about Rs. 13-20 crores per annum. In the year 2000-01, MUL did not declare any dividend. In case this transaction is completed, GOI would receive Rs.1000 crores upfront which would yield interest of Rs100 crores per annum at the conservative rate of 10%. Added to this would be the dividend on the existing shares, even if Government does not sell these shares. If it sells the shares then GOI would receive a minimum of Rs. 142 crores per annum (at the rate of 10%) on the balance receipt of Rs.1424 crores as indicated above. Thus, the minimum annual yield to GOI would be Rs. 242 crores against the present dividend level of Rs. 13-20 crores per annum.
12. Value enhancement by SUZUKI: The Revised JVA incorporates commitment by SUZUKI that:-
° Suzuki will endeavour to make MUL the source for some of its models globally.
° Suzuki will assist MUL to access new export markets.
° Suzuki will give discount on certain components as previously agreed to by it.
° Suzuki will set up a task force to explore the possibilities of further reduction in costs at MUL.
° Suzuki will promote MUL and its products in the global market.
° Suzuki will aggressively strengthen MUL’s manufacturing and technical capabilities so as to make MUL’s products internationally competitive in terms of quality and cost.
In case the withdrawal of GOI results in SUZUKI undertaking the above activities, the beneficiary would be not only SUZUKI but also the Indian automobile sector in India. MUL today contributes nearly Rs. 2500 crores to the national exchequer annually. Also higher growth and earnings of MUL would result in higher receipts to GOI through taxes from MUL. Further, all the above measures by SUZUKI would enhance the value of MUL and hence ensure the possibility of much higher receipts than the minimum estimated above.
13. Price Multiple ratio analysis : One other vway to look at the transaction would be to test the P/E in this case with the P/E of earlier disinvestments. The P/E in earlier cases have been 37(HTL), 63(IBP), 11(VSNL), 19(BALCO), 12(CMC) and 26(HZL). In case we take the conservative scenario discussed above, GOI receives Rs. 2424 crores for 49.74% holding which means an equity value of Rs.4873 crores for MUL as a whole. The Profit earned by MUL in 2001-2002 was Rs 55 crores. This gives a P/E ratio of about 89, which compares very well with P/E of the earlier disinvestments.
14. Comparable Companies: Taking the conservative scenario discussed above, the per share value works out to about Rs 3684, which is far above the present Book Value of about Rs. 2000 per share resulting in price to book value ratio of 1.8. Also it is higher than the valuation made by the three valuers. This is relevant as most automobile sector companies are currently trading at less than even their book values.
BACKGROUND TO NEGOTIATIONS
15. MUL, India’s dominant automobile manufacturer, is a joint venture of Government of India (GOI) and Suzuki Motor Corporation (SUZUKI). As on year ended March 31, 2001, MUL had an equity capital of 132.30 crores and a net worth of Rs. 2642 crores. With the advent of competition, Maruti’s profitability has been under pressure.
16. As per the existing joint venture agreement, both GOI and SUZUKI had joint control over the management of MUL and took turns in appointing the Chairman and Managing Director of the company. In addition, the joint venture agreement restrained the GOI from selling the shares of MUL to a third party without the consent of SUZUKI.
17. Government had decided in February 2001 on disinvestment in MUL through the option of MUL offering shares on a rights basis to existing shareholders with a renunciation option. Government constituted a Negotiating Team to negotiate on behalf of the Government with SUZUKI. The Team comprised Secretary, Ministry of Disinvestment, Secretary, Department of Heavy Industry and Shri KV Kamath, Managing Director and CEO, ICICI Ltd. The Committee was asked to negotiate and finalise the modalities of disinvestment with SUZUKI.
MEETINGS WITH SUZUKI
18. The first round of meetings were held between the Negotiating Team of GOI and SUZUKI between 2nd March 2001 and 12th March 2001 at New Delhi. At the conclusion of the discussions, a record note of discussions was signed by both the parties on 13th March, 2001. To summarise, both sides had agreed that the road-map for disinvestment of GOI shares in MUL would comprise two phases – rights issue in the first phase and, after the completion of the rights issue, sale of existing GOI shares in the market in the second phase. It was acknowledged that this road map would help in bringing in capital into MUL required for its expansion and growth and at the same time lead to increase in the value of MUL and its share price discovery through a transparent manner, which would help determine the benchmark for further disinvestment.
19. The value of the rights issue agreed upon was Rs.400 crores, which was arrived at primarily on the basis of the estimates of capex requirements in MUL.
20. Regarding valuation of Maruti shares, it was agreed that GOI and SUZUKI would jointly identify and appoint three reputed valuers to determine the value of shares and the average of the three values accepted.
21. KPMG, Ernst & Young and S.B. Billimoria were appointed as Valuers and they submitted their valuation reports in January, 2002, copies of which were also made available to SUZUKI. The fair value per share recommended by the three valuers are Rs. 3200 by KPMG, Rs. 3142.18 by Ernst & Young and Rs. 3500 by S.B. Billimoria. The average of the valuations made by three different valuers works out to Rs.3280.
22. After receipt of the valuation report, the second round of meetings were held between the Negotiating Teams of the GOI and SUZUKI between 12th February 2002 and 29th April 2002 at New Delhi to arrive at an agreement on the price at which the rights issue would be made, the portion of the GOI’s rights share to be subscribed by SUZUKI, the renunciation premium and the control premium and modalities for the sale of existing shares held by GOI, etc. Discussions were also held to finalise the Revised Joint Venture Agreement. At the conclusion of the discussion a record note of discussion was signed by both parties
23. Kotak Mahindra Capital Company Limited (KMCC) acted as the financial advisor to GOI. Dua & Associates were legal advisors to Government.