Timken India: Acquires ABC Bearing

ABC Bearings is engaged in the business of engineering, product design, manufacturing, distribution and sale of bearings including inter alia taper roller bearings (contributes over 80% of the total revenue- Mar 16), cylindrical roller bearings, spherical roller bearings and slewing bearings; and procurement, distribution and sale of other bearings, grease, oil and UJ Cross not manufactured by the company but sold under the "ABC" brand. It serves an established original equipment customer base in India, focusing on heavy truck and off-highway industries. Company shares are listed on BSE. Timken India Limited, the country’s third-largest bearings maker by sales, engineers and manufactures bearings and mechanical power transmission components including gear drives, couplings, belts and chain. They also provide industrial services including bearing repair and powertrain rebuild. It also imports products such as spherical roller bearing, cylindrical roller bearing and specialty roller bearing from various group entities. Company’s Jamshedpur plant has awarded International Railway Standard certification which enables them to export Rail Products even to European Rail Market. Shares of the company are listed on BSE and on NSE. Transaction Scheme of Amalgamation between ABC Bearing Ltd (Transferor) and Timken India Ltd (Transferee) and their respective shareholders and creditors. Consideration being 5 equity shares of Rs 10 each of Transferee company for every 8 equity shares of Rs 10 each of transferor company. Appointed date is date on which the last of the sanction orders is passed or such other date as the NCLT may direct. Financials Timken India has a current market cap around Rs. 4,900 crores whereas ABC Bearing has a market cap of Rs 490 crores (approx.). ABC Bearing is almost 1/10th in size of Timken India. Both companies are having a healthy reserve and are in profits. Table 1: Financials of Timken India & ABC Bearing as on March 2017(All Figs. in Rs. Crores) Timken India ABC Bearing CombinedrnEquity 68 11.55 68rnReserve 550 127.26 677.26rnNet Worth 618 138.81 745.26rnLoan (*Government grants) 18.30* 29.56 47.85rnFixed Assets (including CWIP) 289 150.61 439.61rnP&L Extract (March 2017)rnTotal Income 1,127.14 190.35 1317.49rnExpenses 959.24 158.46 1,117.70rnEBITDA 167.90 31.89 199.79rnDepreciation & amortisation expense 28.89 12.58 41.47rnEBIT 139.02 19.31 158.32rnInterest 0.84 5.13 5.97rnPBT 138.18 14.17 152.35rnPAT 97.20 11.85 109.04rnShareholding Patte rnPromoters of ABC bearing will not have participatory role in management and are giving exit by way of equity shares and will be part of Public shareholding category and holding of Timken Singapore (Parent company) will be reduced from existing 75% to 67.8% post-merger. Even if ABC promoters are considered under promoter group still shareholding will be below 75% of promoter group and will not have any violation of SEBI requirements. Table 2: Pre & Post Transaction Shareholding Patte rnParticular Pre PostrnTimken ABC TimkenrnPromoter Group 75% 38.76% 67.80%rnPublic 25% 61.24% 28.48% (*ABC Promoter Share Post-merger) *3.72%rnTotal 100% 100% 100%rnPremium to ABC Bearing Shareholders Table 3: Share Swap Ratio Particular Timken India ABC BearingrnSwap Ratio 5 shares 8 sharesrnClosing Mkt Price (04/07/2017) Rs. 675.95 Rs. 238.10rnTotal value for swap 3,380 1,905rn% Premium - 77%rnCurrently, market price of Timken shares is also trading at 7-8% premium even after the post-merger effect. Valuation Approach Income approach is followed for valuation of shares of both the company using Comparable Companies Multiple (‘CCM’) method. Benefit from the deal To ABC Bearing Shareholders From the deal, shareholders of ABC will gain premium of 77% on per shares.rnTo Timken Shareholders The move will bolster Timken’s position in the tapered bearings market in which its Parent company is leading global manufacturer.rnTimken has the option of using ABC’s facilities for the Commercial Vehicles portfolio, thereby freeing its Jamshedpur capacity for growing supplies to railways. Timken doubled its overall capacities in FY17.rnTimken’s FY-17 export is Rs 32.93 crores which is around 30% of total its revenue, acquisition will help to further boost its export capacity and helps them to meet their export obligations.rnCompetition Currently, Timken is third largest bearing player in Indian Market. All the major players are having competitive margins, acquisition of ABC Bearing will certainly give boost to Timken’s performance, but as of now SKF and Schaeffler will lead the race. Table 4: Finacial Analysis of Competition Name Mkt Cap Operating Revenue (Mar 17) EBITDA EBIT Net Profit EBITDA% EBIT % NPM%rnSKF India 7,789.51 2,835.54 423.48 375.60 243.89 14.93% 13.2% 8.60%rnSchaeffler Ind (Dec 16) 6,896.17 1,945.16* 365.20 301.10 195.10 18.77% 15.5% 10.03%rnTimken 4,947.34 1,117.22 167.90 139.02 97.20 15.03% 12.44% 8.70%rnNRB Bearings 1,170.83 727.59 127.09 94.76 53.98 17.47% 13.0% 7.42%rnABC Bearing 490.76 189.77 31.89 19.31 11.85 16.80% 10.18% 6.24% *Revenue is on gross basis Conclusion Though structurally transaction is merger but in fact it is acquisition as ABC’s promoters will not get the board seat post-merger nor they will participate in management in any way. Further their holding will be only 3.72% in the merged entity. They will be financial investors. Timken is among leading bearing manufacturer acquired a comparatively smaller company which is specialized in tapered rolling bearing. Growth of ABC bearing on their own in front of three major foreign players is a bit challenging considering the technological advantage with these players, hence management of ABC Bearing took the right decision for itself and shareholders considering future growth and expansion. Timken ease down the competition little bit by acquiring ABC, it will boost their manufacturing capacity and helps them to caretake demand. Acquisition also gives access to indigenous suppliers and domestic market of ABC bearing. It seems this is the beginning of consolidation in the bearing industry, recently Schaeffler India (Formerly known as FAG Bearing) announces merger of its two arms which will further consolidate their revenue and strengthen its position in the market and making it difficult for Timken to become second largest or still there will be some more acquisition.