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Event update: Motherson Sumi Systems (Outperformer) - Reydel Acquisition – visible synergies

Motherson Sumi’s (MSSL) subsidiary, Samvardhana Motherson Automotive Systems Group B V (SMRPBV) has entered into an agreement to acquire a 100% stake in Europe-based Reydel Automotive, a privately-owned company of Cerberus Capital Management. Reydel is a global supplier of internal polymer components such as cockpit modules, instrument panels and door panels.

Key highlights

EBITDA positive, high RoCE business: In FY17, Reydel clocked revenues of US$1bn (+18%) and EBITDA of US$68mn (EBITDA loss of US$16mn in CY2013). Reydel is a cash flow positive company, with capex funded via internal accruals. The company has very low net working capital requirement. While Reydel does not have any funded pension liabilities, unfunded pension liabilities stood at US$9mn in CY17. The company currently has an ROCE of 25%, which the management has indicated will boost to 40% over couple of years.

Key synergies: For MSSL and particularly for SMRPBV, this would be a synergistic acquisition on multiple fronts: (a) Geographical expansion: Reydel would help add new geographies (The Philippines, Morocco, Croatia and Argentina) in which SMRPBV is not present. (b) Technology: Management indicated that the acquisition would provide access to new technologies, as Reydel’s technology and engineering capabilities are different from those of MSSL, (c) Customer addition: SMRPBV would be able to add to its customer base through Reydel, which has strong customers like Renault, PSA, RSM and Ssangyong, (d) Lower capex: MSSL’s capex needs would reduce in countries where Reydel has a footprint, (e) Although Reydel is profitable, past accumulated losses would aid tax savings for SMRPBV.

Valuations inexpensive; acquisition EPS accretive: Ballpark (we do not have the full financials of Reydel), the deal value of US$201mn implies an EV/EBITDA of 2x CY17 (a substantial discount to similar deal valuations of 6-8x). The deal is based on a Lockbox method under which all business cash flows accrue to the buyer from the Lockbox date, ie, 1 Jan 2017.

Valuation & View: While SMP is a strong player in the interior components business, this acquisition is likely to add value with geographic/customer expansion and access to new technologies. Further, Rydel’s cash surplus position and EBITDA margin of 6.5% provide comfort. Prima facie, the acquisition seems extremely inexpensive. We note MSSL has an extremely strong track record in acquisitions and thus reiterate our Outperformer rating on the stock with a target price of Rs415