The ABC of selling off Maruti

A stands for the Actual Value of the country’s top automaker Maruti Udyog, or the company that’s become the biggest headache for Disinvestment Minister Arun Shourie, with a near breakdown in talks between the government and Suzuki Motor Company of Japan. The exercise done by three professional valuers for Shourie’s ministry puts Maruti’s worth at Rs 4,400 crore. That puts the value of the government’s 50 per cent stake in the firm at Rs 2,200 crore. Hence, the value of the 6 per cent shares it plans to renounce in favour of Suzuki (to allow Suzuki to get full control of the firm) works out to Rs 264 crore.

B stands for the Bid that’s been made by Suzuki for gaining full control of Maruti. While both sides remain tight-lipped on the bid price, clearly it’s very low since the talks have reached break-point, with the disinvestment ministry even asking the Japanese negotiating team to go back home.

C stands for the Control Premium the government wants if Suzuki is to get control of Maruti. The government’s strategy is simple. Since its share in Maruti is worth Rs 2,200 crore, it wants to get all of this from Suzuki. Never mind if it’s selling (or renouncing) just 6 per cent of its stake to Suzuki — for, as soon as this happens, Suzuki gets control of Maruti. So it wants Suzuki to pay for 6 per cent of Maruti shares what it would pay if it bought the entire 50 per cent share — imagine the furore the Congress will create if Suzuki gets Maruti for a mere Rs 264 crore.

D stands for Shourie’s Dilemma as he knows he has no hope of getting Suzuki to pay this kind of money, and that too for a firm that’s so dependent on it for technology — what are Maruti’s cars worth without Suzuki’s engines? Besides, no one’s going to pay Rs 2,200 crore for a company whose annual profits are in the region of Rs 300 crore (globally, auto firms make profits of 2-3 per cent of turnover).

The Tatas, by way of comparison, paid Rs 1,439 crore to get full control of telecom giant VSNL recently, and that’s when on a similar sort of turnover, its profitability is double that of Maruti’s.

Also, if Suzuki is to pay Rs 2,200 crore for shares worth Rs 264 crore, this means it will be giving a ‘control premium’ of over 800 per cent. By contrast, the Tatas paid a control premium (in terms of their bid price over the market price of the shares) of just 28 per cent for VSNL, and IOC paid a little over 100 per cent for its IBP purchase. Most other deals, such as Toyota buying Daihatsu in 1998 or Renault taking over Nissan in 1999, have been made with little or no ‘control premia’ being paid. And General Motors actually reduced its $5 billion bid for all of Daewoo Motors plants to just $400 million (and a debt obligation of $510 million) for four of Daewoo’s best plants.

E stands for the Emotive value of Maruti as far as Indians are concerned. With over 35 lakh Marutis on the road today, and another four lakh added every year, Maruti is one of India’s most valued firms. Clearly there’s going to be a huge stink if Suzuki manages to get control of Maruti by paying just Rs 264 crore — and maybe another hundred crore or so more as ‘control premium’ to buy 6 per cent of the government’s shareholding.

F stands for Fast Forwarding of the alphabet, to N, and then to T, and finally, to the end, Z.

N stands for Nuisance Value Premium. Going by the virtual lack of ‘control premium’ paid for taking over of firms abroad — Toyota-Daihatsu, GM-Saab, you name it — or the relatively low ‘control premium’ even in recent sale of Indian PSUs like VSNL and IBP, clearly the government negotiators need to try another tack to get Suzuki to significantly up its offer. The one they need to use is their Nuisance Value, or the government’s ability to prevent Suzuki from running Maruti efficiently. For years, for instance, government nominees on Maruti’s board didn’t allow Suzuki to replace the ageing engines in top-selling models like the M800 — as a result, when the Supreme Court ruled that only Euro-I engines would be sold in the National Capital Region, Maruti couldn’t sell its cars for many months. And for several years, Maruti wasn’t allowed to dismiss militant unionists who were disrupting work, for the same reason of government directors not allowing it. So the longer the government remains in Maruti, the worse the company will perform. Suzuki should be willing to pay a king’s ransom to stop that.

T stands for Time Is Of The Essence. The government just has to close the deal quickly. For one, with increasing competition, Maruti’s profitability will keep falling — profits fell from Rs 651 crore in 1998, to 330 in 2000, and finally to a loss of 269 last year. And let’s not forget the Daewoo example of how the firm’s value went down with each passing day. The Maruti deal, similarly, isn’t going to get any sweeter for the government with the passage of time. So maybe it needs to temper its expectations.

Z stands for Zen, or the enlightenment both Suzuki and the government need if this deal is going to get anywhere.

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