Volvo has bought 45.6% stake in Eicher's subsidiary, rather than taking the direct routeEicher Motors has given its commercial vehicle (CV) business a fresh lease of life by partnering with truck maker Volvo.
Volvo has bought the 45.6 per cent stake in a subsidiary into which Eicher will transfer the CV and related component business. But valuations could suffer as a result of the holding company discount.
The shareholders of Eicher Motors will not get the proper value of the CV business even though the accounts of the subsidiary will be consolidated with those of the parent company.
Ideally, Volvo should have purchased direct stake in the parent company. The resultant open offer would have given the shareholders an option to sell.
Not surprisingly, the stock of Eicher Motors has declined 14 per cent to Rs 468 since the announcement of the JV.
The deal values Eicher’s 54 per cent stake in the JV at $418 million or Rs 595 a share.
Eicher will continue to own the motorcycle business which contributes about 10 per cent to sales and just about breaks even.
It has remained a small player in the CV space, with a share of about three per cent. It will benefit from the infusion of cash, amounting to $275 million and technology from Volvo.
However, it will be some time before Eicher-Volvo gains market share as the CV market itself is going through difficult times.
While the deal is a great one for the promoters, it will be a long time before shareholders make money.
Source - Business Standard
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