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Corporate Nov 27, 2012

Aston Martin buy: Can M&M achieve what Tata did with JLR?

By Firstbiz Staff

Even though Kuwaiti firm Investment Dar Company, owners of Aston Martin, have denied selling stake in the luxury sports car firm, Mahindra & Mahindra investors are wary of this trophy acquisitions after media reports said that M&M could be part owners of Aston Martin by the end of the week.

It was reported over the weekend that Anand Mahindra-led M&M, which was once keen on buying Jaguar Land Rover too before it went to the Tatas, is in race to acquire a significant stake in this globally recognised automotive trophy asset for around Rs 6200 crore ( 250-300 million pounds) in order to obtain an edge over its peers, especially Tata Motors.

Picture courtesy:Overdrive

M&M is the world's largest tractor maker and is the leading SUV manufacturer in India. It also controls South Koreaa's Ssangyong Motor but lacks any luxury or sports cars in its portfolio.

However, investors will be wary of such an acquisition as Aston Martin carries a pile of debt with it. Secondly, for Anand Mahindra, the deal is more like making a statement than finding a strategic fit for its portfolio. This fear was evident in the more than 3 percent fall in its stock on Monday. A similar investor disappointment over high valuation was experienced when Tata's owned Indian Hotels bid for luxury hotel chain Orient Express.

Like the hotel industry which is suffering due to the global slowdown, demand for luxury and sports car has been muted.

"The luxury and sports car market is getting into a phase of low growth across the world," Jitendra Panda, head of institutional sales at Future Capital Holdings Ltd in Mumbai, told Bloomberg. He fears that Mahindra's money may get stuck in a high-debt venture where returns are expected only after a few years.

Another concern would be the management's bandwidth to manage the size and operations of Aston Martin.

"Despite putting in money, Mahindra may not have an operational control over Aston Martin. Just by owning 50 percent controlling stake, but 40 percent equity stake may not offer it an operational control. Probably, this is weighing down upon the market," Mahantesh Sabarad, senior vice president, Fortune Equity Broker, told CNBC-TV18 in an interview.

Analysts are also questioning the link between the two companies.

While Mahindra and Mahindra's bid for a 50 percent stake in the UK-based sports carmaker, will definitely enhance its global footprint in the long run, lack of synergies between the two brands (Mahindra 's core business being utility vehicles and Aston Martin's being fast cars that cater to a fictional British spy and to real-life billionaires) will pose challenges in the short term. Moreover, continuous heavy investments post-acquisition in order to ensure that Aston Martin stays in touch with better-resourced competitors can make it a tough drive for M&M.

The financial stress on M&M both in the acquisition of Aston Martin and the subsequent investments in R&D, marketing etc will weigh on the company.

Brokerage Edelweiss in a note said that Aston Martin would require significant investments in research and development, and benefits of technology transfer to the Indian tractor and utility vehicle maker's product portfolio was 'questionable' given little similarity between portfolios.

"It's difficult to visualise a tractor and an Aston Martin in the same garage," Mads Kaiser, a Silkeborg, Denmark-based fund manager with JI India Equity Fund, which owns Mahindra shares in its $200-million Indian equities portfolio, told Reuters.

"The acquisition will broaden their portfolio but doesn't add anything to their tractor or India portfolio."

"Large investments could be required to expand product portfolio and distribution reach," Reuters quoted a Barclays report as saying.

Even if Mahindra does manage a brand makeover with this buy, the biggest challenge will remain from its cash-rich competitors Porche and Ferrari. Aston Martin is a relatively small company in a niche market, selling just a few thousand cars every year. As against this, Ferrari and Porsche, both have the financial and engineering muscle of major companies behind them. According to Theo Leggett Business reporter, BBC News, this will be Aston's biggest challenge in developing new products to beat competition.

Another reason why analysts are wary of such a buy, is Mahidnra's poor show in non-core sectors. A report in the Times of India cites M&M's poor show in two-wheelers which has not worked for the company so far and raises doubts whether the company will be able to handle a luxury brand like Aston Martin where it has no experience at all.

by Firstbiz Staff

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