Tata Motors Ltd, the country's largest commercial vehicle manufacturer, will sell 20% stake in Telco Construction Equipment Company Ltd (Telcon) to its Japanese partner Hitachi for Rs 1,000 crore, or $220 million, said sources directly involved with the development. A term sheet to this effect has been signed and the deal is expected to close within 30 days.
Currently, Tata Motors holds 60% stake with Hitachi Construction Machinery Company Ltd keeping the remaining 40%. The transaction is part of Tata Motor's ongoing deleveraging exercise, sources added.
The deal will see the control passing over to Hitachi which will work on significant new technology transfer to boost the firm's operations at a time when it has struggled on revenue growth even as the prospects for India's construction and infrastructure sector remain robust.
Standard Chartered and KPMG are advising Tata Motors and Hitachi respectively. The deal would value Telcon at nearly Rs 5,000 crore ($1.1 billion), which is a significant uptick in the company's valuation compared to $44.25 million Hitachi paid for a similar quantum of stake in 2005.
While earlier reports indicated that Tata Motors might exit the business by divesting its entire holding, sources familiar with the process ruled out the possibility. "Tata will divest 20% stake, and has no plan to dilute further anytime soon," said a source who did not wish to be quoted. Mint reported last week that Tata Motors could exit Telcon in favour of Hitachi.
"Tata Motors has, from time to time, indicated its strategic intent on divestments to deleverage the balance sheet. As and when these are concluded, we will make appropriate announcements. We have no further comments," said Tata Motors spokesperson Debasis Ray in an emailed response when contacted by VCCircle. An email sent Hitachi Construction Machinery did not elicit any response.
The deal is likely to help Tata Motors reduce its debt. The firm had a consolidated debt Rs 23,100 crore as of December 2009 with a debt-to-equity ratio at 4.3. The debt mostly came from the acquisition of Jaguar Land Rover from Ford Motor Cofor $2.5 billion.
Since last year, Tata Sons, the holding firm of Tatas, has sold stake in group companies like Tata Consultancy Services in order to pay debt. It also raised $750 million by issuing global depositary receipts and convertible bonds to pay down debt in October 2009.
The firm is also unlocking value in vehicle financing arm, Tata Motors Finace, by selling a 20-30% stake. This deal is awaiting the RBI nod, as per a report in PTI.
Telcon was set up in 1999, after being spun off from the construction equipment business unit of Tata Motors, as a wholly owned subsidiary.
Tata Motors inducted Hitachi into Telcon by divesting 20% of its stake in 2000. This stake was doubled by Hitachi in 2005 for Rs 203.55 crore ($44.25 million), valuing the venture a little over Rs 1,000 crore. The valuation of the company has climbed up on the backdrop of increased spending on India's construction and infrastructure industry.
Telcon, which is based out of Bangalore, suffered a fall in gross revenue by more than 21% in FY09 at Rs 2,143 crore as compared to Rs 2,735 crore in the previous fiscal. Profit after Tax (PAT) also fell to Rs 85 crore from Rs 324 crores in the same period. Telcon also acquired two Spanish companies in 2008 - Serviplem S.A and Comoplesa Lebrero S.A - which operate as subsidiaries.
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