Maruti to merge Suzuki Powertrain with itself

The board of Maruti Suzuki, India's largest carmaker, has proposed to merge Suzuki Powertrain India Ltd (SPIL), the diesel engine and transmission firm with itself, by entering into a stock swap transaction with its Japanese parent Suzuki Motor. The merger will not result in any cash outflow.

The move is seen as a bid by the Japanese carmaker to align the engine manufacturer with the expansion plans of Maruti Suzuki, which is planning to increase production capacities of its diesel powered cars. 

The merger would see SPIL being spun into Maruti Suzuki by December, this year, in exchange for Maruti Suzuki shares that are valued at about 1,500 crore ($268 million). 

The swap ratio has been fixed at 1:70 whereby Suzuki would receive one share of Maruti (of Rs 5 each) for every 70 SPIL shares (of Rs 10 each) that will take parent's stake to 56.21% from the current 54.2%. Maruti would issue fresh 13.17 million shares to close the transaction, thus increasing its paid-up capital by Rs 6.5 crore. 

"It is expected that the necessary regulatory approvals and legal requirements for the merger may be completed by end December 2012. Once the merger is approved, the books of accounts of SPIL will be merged with MSI with effect from April 1, 2012," the company said in a statement. 

Maruti Suzuki shares rose 3.34% to Rs 1,146.30 at close of trading at the BSE on Tuesday. The merger will enable Maruti Suzuki to align the expansion of the diesel engine maker with its own expansion plans, as demand for diesel engine cars outpace petrol fueled cars in India. 

SPIL's turnover in last fiscal stood at Rs 4,550 crore with a net profit of Rs 150 crore. It also carries a debt of Rs 550 crore, which will now go into MSI's book following the culmination of the merger process. The deal values the engine unit at about Rs 2,100 crore.

Maruti currently holds 30% in SPIL, which supplies 3 lakh diesel engines and transmissions every year to MSI. The proposed merger would consolidate the diesel engine production by bringing it under its management control. "We will be able to bring all the diesel engine capacity under Maruti leading to better integration and flexible production based on market needs," Maruti Suzuki MD S Nakanishi said. 

Maruti had announced Rs 1,700-crore investment for a new diesel engine plant at its Gurgaon plant that would have a cumulative capacity of 3 lakh units by 2014. The proposed merger is expected to improved synergies in areas like finance, capital structuring and administration for Maruti in the long term. 

The Indian market has seen customers preferring diesel-powered vehicles in the past few years as price of petrol has zoomed and reached its historically high in May this year. Petrol costs about 74% more than diesel in India now, compared with about 28% more in June 2010, Maruti MD S Nakanishi said. 

Maruti has been facing diesel engine constrains even as its diesel model sales increase to 38.5% of its total cars sold in May this year from the 24% of its total sales last year. 

The company would absorb all the 2,600 employees of the diesel making units under Maruti Suzuki's 10,000 strong work force and does not have any plans to reduce any jobs. "We will bring all the employees of SPIL under Maruti Suzuki and also restore parity of wages and other benefits once the merger is complete," Maruti chief operating officer (administration) SY Siddiqui said.