With the signing of definitive agreements, Eicher Motors Ltd. (EML) and AB Volvo have formalised their joint venture partnership. The joint venture comprises Eicher Motors’ entire truck and bus operations and the Volvo Group’s Indian truck sales and service operations. Besides commercial vehicles, it also encompasses the components and engineering design services businesses of EML. However, Royal Enfield Motorcycles will remain outside the purview of the joint venture and continue to operate under the aegis of EML.
The joint venture company (JVC) has its genesis in early December of last year when EML and Volvo signed a letter of intent to forge this alliance. It is proposed to be named VE Commercial Vehicles Ltd.
“This agreement provides a very solid platform for further growth of the Indian market for heavy trucks, which is the fourth largest in the world,” said Mr. Pär Östberg, member of the Volvo Group Executive Management and responsible for the group’s Asian truck operations. “India is investing heavily in improving its infrastructure and, together with Eicher, we have highly favourable conditions to further strengthen our position in the Indian market.”
Sharing Mr. Par Ostberg’s conviction, Mr. Siddhartha Lal, Managing Director and CEO, commented: “This joint venture draws on Volvo’s global strength in technology and distribution, especially in heavy duty trucks and on Eicher’s success in India and its innovative low-cost platform. We will work towards shaping the commercial vehicle industry in India and developing markets.”
The following are the agreements details:
* The CV business of EML, along with related components and design services business, will be transferred to the JVC, a step down unlisted subsidiary of EML, on a slump sales basis at a value of Rs. 2,022 million.
* Volvo will contribute Rs. 10,821 million in cash and will also transfer its Indian truck distribution and service network to the JVC in lieu of Volvo’s allotment of 45.6 per cent.
* EML will hold the balance 54.4 per cent equity, and thus the JVC will be a subsidiary of EML. The JVC’s financials will be consolidated with that of EML.
* Volvo will also buy 8.1 per cent equity stake in EML from its promoters at a consideration of Rs. 1,574 million @ Rs. 691.68 per share.
* Taking into account its direct and indirect holding, Volvo’s economic ownership of the JVC will be 50 per cent.
* The JVC is to be jointly managed by EML and Volvo with shared management and equal representation on the Board of Directors. Mr. Par Ostberg will be appointed its Chairman and Mr. Siddhartha Lal will assume the role of Managing Director and CEO. The other management positions will be appointed by the Board.
* The JVC will have exclusive distribution rights in India for all present and future Volvo truck products.
* All future Volvo Group truck projects in India will be routed through the JVC, subject to agreement on terms and conditions.
* EML and promoters have agreed not to compete in relation to trucks and buses business with the JVC. Volvo shall pay a non-compete consideration of Rs. 393.5 million each to EML and the promoters.
The closing of transaction to form the joint venture will be on receipt of requisite Government approvals, likely to be received shortly. The probable date for the start is July 1 next.
Elucidating on the larger perspective of the JV, Mr. Siddhartha Lal said: “The main purpose of the JV is to become an industry leader driving modernisation in commercial transportation in India and in the developing world. We will pursue an aggressive strategy in the heavy duty trucks segment, where Eicher’s complete range and local market knowledge will be complemented by Volvo’s global expertise in this segment and their already strong presence in the high-end of the Indian market. A large part of the investments of the JV in design, development, manufacturing, systems, distribution and services will be towards creating a strong position in this market.”
The JV will also work with Volvo Buses to create a full range of buses and work cohesively towards giving customers the best and widest bus offering. Eicher’s wide distribution in India will be complemented with Volvo’s focused network in India. In addition, Eicher trucks and buses will be exported through Volvo’s vast global network, especially to developing markets.
“In addition, we see a good growth and future for the components and engineering services business areas which will continue to expand their customer base while greatly benefiting from the JV and Volvo as anchor customers. With large cash reserves and an excellent starting position, we believe that this JV will set a new direction in the commercial vehicle industry,” Mr. Siddhartha Lal added.
Post closing, EML will receive a consideration of Rs. 2,022 million and will be debt free. After payment of taxes and taking into account the fund requirements for future plans, EML may still have surplus cash. The EML Board would thus need to consider the best utilisation of this surplus cash in the interest of shareholders. Eicher Goodearth Investments Ltd. (EGIL) is the holding company of EML and currently has 58.2 per cent of its capital.
Eicher Motors, founded in 1982 to manufacture a range of reliable, fuel-efficient commercial vehicles of contemporary technology, is a significant player in the Indian automobile industry.
