Mahindra & Mahindra has signed a pact to buy 67.9 per cent stake in German component manufacturer, Jeco Holdings. The deal has been struck at an enterprise value of €140 million.(See: M&M to acquire 67.9-per cent stake in German forging company Jeco Holdings)

Hemant Luthra, president of Mahindra Systems and Automotive Technologies, MSAT, Oliver Scholz, member, supervisory board of Jeco Holdings and Thomas Wahner, CEO of Jeco Holdings give the details of the deal as well as how the two entities plan to grow together. CNBC-TV18 shares with domain-b its exclusive interview with Luthra, Wahner and Scholz:

You picked up only 68 or 69 per cent stake in this company. What made it such a compelling or attractive acquisition in that sense that you are willing to do just 68 per cent and not 100 per cent anywhere else?
Luthra: I do not know why do you think it's just a 100-per cent stake that makes sense. You have got the management, prior owners and even the customers, who are committed because they see a familiar face. So to earn 67-per cent stake makes perfect sense to us, particularly when the partner too wants to partner with you to grow the company.

You have been looking at a lot of other acquisitions within the space. Then why did you choose this company only?
Luthra: Firstly, it is because of value systems. When we started discussions with Thomas and Oliver, we found that the same kind of value system. They have been committed to growth, to professionalism and they had a strong track record of making it a profitable company.

Secondly, they own intellectual property for high-margin products. Third, 50 per cent of their production is machined that gives value addition. Fourth, they have got a set of equipment, which is completely complimentary to what we have in Stokes and MASL (Mahindra Automotive Steels Limited). So it just took 16 months to do it, but it panned out.

Your company or your family has promoted this company many years ago, why did you choose to divest some of that stake and sell out?
Scholz: We want global growth and that was the reason why we took the chance to go along with Mahindra because Mahindra gives us this global growth. We were therefore able and ready to go into minority.

Can you give us some sense of what kind of growth potential you see for Jeco over the next three-five years? What kind of expansion expenditure you foresee and how much of that you expect to come from your new partner now?
Wahner: I see a really huge possibility of expanding, not only in the Indian market, but also in the whole Asian market. And as my colleague said, without a partnership with Mahindra & Mahindra, we would have not had the opportunity to reach the level of being a global acting forging company. That was the reason why we sit together and have the same targets, same goals.

Can you give a sense of what that growth rate is likely to be over the next three-five years?
Wahner: As Mr. Luthra said, we of course are talking to a couple of companies in order to fulfil this target, especially in the Asian market. But we also have close contacts with some more companies in the European market.

Luthra: The forging company business in India is growing at 25-30 per cent CAGR. If we have Mahindra's design and engineering skills and we have the ability to service some of the requirements of Jeco's customers from a low cost base, I would be disappointed if we do not hit that rate of growth as collectively as a global entity.

For this specific acquisition value, all you have given us is an enterprise value and you have said that includes a rather conservative debt portion. Comparing this, your Stokes acquisition was done at half the total revenues for Stokes. What is the attractiveness grade you had given the acquisition value?
Luthra: As attractiveness grade, I would put this one as 9.5 out of 10 because we have already told you that there is €180 million of revenue and that the enterprise value is €140 million.

The reason why I am not specific on debt is because the way most deals are structured in a way that we arrive at a handshake, then at a value. Going forward with the company making profit, it reduces its debt. On the date that the final regulatory approval from Germany, India, Mauritius and everything comes through, that debt maybe gone or may have reduced by 50 per cent.

Are you intending to acquire 69 per cent in a debt free company?
Luthra: I do not know whether that will happen; the debt will not be completely gone. We want to expand the business. And it's a combination of so many things. It's a combination of his cash flow; his capex need and of our capex need. And it also is a function of how long the regulatory approvals will take.