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Set to become a global CV player with the Iveco buyout

May stretch the balance sheet if synergies do not play out as planned

Tata Motors (TTMT)’s Board has approved the acquisition of a 100% stake in IVECO Group NV, through an all-cash voluntary tender offer (ex-defense), subject to regulatory approvals. The transaction price offered is at an equity value of €3.8b, which translates to 2x TTM EV/EBITDA. Key synergies of this acquisition include 1) access to global technology, design, and global talent, 2) transformation of the combined entity as the fourth-largest truck OEM globally in terms of volumes, 3) leveraging each other’s strengths through complementary products and regions, and 4) potentially optimizing the combined R&D spending by integrating planned investments in evolving technologies. With the planned funding strategy, TTMT expects to 1) remain FCF positive in both companies, 2) reach EPS breakeven in two years, and 3) repay the acquisition debt in four years. While there is no doubt that this acquisition will provide scale and tech access to TTMT’s CV business, it comes with its own risks, such as: 1) uncertain macro backdrop in Europe that is reflected in the downward revision of Iveco’s growth guidance for CY25, 2) the scale of the transaction may lead to unnecessary financial stress on the balance sheet until it is well integrated, and 3) Iveco’s stock has doubled in the last 12M, which means that the acquisition is not inexpensive. We refrain from incorporating the Iveco financials into our numbers at this stage as we await more clarity on the deal. We reiterate our Neutral rating on TTMT given the current headwinds at JLR.

Key highlights of the deal

* The business has three segments: Industrials (Truck, Bus, and Powertrain), Financial Services, and Defense.

* Transaction perimeter: €14.1b in revenue; €891m adjusted EBIT (6.3% margin) in CY24; defense excluded.

* The defense business would be sold/spun off before the settlement of the Voluntary Tender Offer.

* The price offered was €14.1/share, implying a total equity value of €3.8 billion (excluding defense).

* An irrevocable commitment was secured from Exor, which is the largest shareholder of Iveco, to tender all of its shares and support the transaction.

* Funding of €3.8b secured through the Bridge Financing Facility (Facility) committed by Morgan Stanley & MUFG.

* The facility is expected to be syndicated and then termed out with a mix of equity and long-term debt over the next 12 months from the closure of the transaction.

* The transaction is expected to close by Apr’26 after receiving all regulatory approvals.

Key highlights of the IVECO business model

Trucks (revenue EUR10b, EBIT margin 5.6%)

* A leader in the EU upper-end LCVs (6.01-7.49T), with ~65% market share

* LCV market share in the EU stands at 12.2% and 18% in LatAm.

* In MHCV, the share in the EU stands at 8.4% and in LatAm at 9.2%

* Perception of this business has undergone a drastic change in the recent past, with their MHCV trucks now emerging as leaders in terms of TCO for customers

* CY28 target set at 6.5-7.5% EBIT

Buses (revenue €2.6b, EBIT margin 5.5%)

* A market leader in the EU intercity segment with a 50% share in CY24.

* The number 2 player in the City bus segment in the EU.

* Aims to reinforce its intercity leadership in this segment

* Plans to replicate its intercity success in the city bus segment, which is largely tender-driven

* CY28 target set at 8% EBIT

Powertrain division (revenue €3.5b, EBIT margin 6.2%)

* Its entire portfolio is Euro 6 compliant, and it is now working on Euro 7

* The company has a strategy to be the last man standing for ICE powertrains

* CY28 target set at 9.5-10.5% EBIT

Captive finance arm (revenue €0.5b, RoA 2%)

* Over 50 years of presence in this business

* Delinquencies on book well under control at 1.9% with RoA of 2%

Strategic rationale for the acquisition

* TTMT gets access to Digital & Autonomous capabilities through integrated ADAS, SDVs, telematics, and connected fleet tech. It also gets access to a global talent pool and the famed Italian design and engineering capability.

* Creating a global player and a platform to compete on a truly global basis, unlocking the ability to invest boldly for long-term growth. Together, TTMT and Iveco would become the fourth-largest truck OEM globally, with players between 2 and 4 being placed very close to each other.

* Leveraging portfolio strength and geographical complementarity makes it easier to leverage each other’s strengths. Iveco products start where TTMT products end, and hence the portfolio is complementary. With this transaction, TTMT will be able to market its products in Latin America by leveraging the established network of Iveco, which would have been very difficult to do on its own. It could also look to launch a few Iveco products in India that make business sense.

* Diversifies portfolio exposure across markets and segments, thereby reducing the impact of cyclicality on group cash flows. The company can optimize combined R&D spending by integrating planned investments in EVs, alternate fuels, emissions, ADAS, SDV, etc. On the back of such synergy benefits, it expects to realize savings of 0.5% of combined revenues by CY28.

What is in it for the shareholders?

* Provides a strategic, meaningful, and relatively lower risk avenue to invest and grow.

* The move expands the capabilities of the Indian business by providing access to technology in emerging areas.

* With revenue being 3x higher and robust returns, the combined entity is wellpositioned to invest boldly in future growth.

* Both businesses are cash-generative, and the portfolio and geographical diversification significantly reduce cash flow volatility at the consolidated level.

* The complementary product portfolio and geographical footprint enable smooth and effective collaboration between the two companies.

* The transaction is financially prudent. With the planned funding strategy, TTMT expects to: 1) remain FCF positive in both companies, 2) reach EPS breakeven in 2 years, and 3) repay acquisition debt in four years. The combined entity is likely to deliver 20% RoCE over a period (TTMT’s CV business generates 40% RoCE).

* Management has also indicated that the transaction per se has no impact on production sites, customer contracts (including with local transport authorities in Iveco’s markets), or current employment levels, as there is no overlap in portfolio or geographical footprint. However, the Iveco Board would continue to drive decisions for long-term growth and competitiveness of the business.

Fund raising plans

* On an indicative basis, management has indicated that it would look to fund this acquisition through a mix of debt and equity, with 30-40% from equity and the balance from debt.

* Management would also look to monetize some non-core assets to minimize equity dilution.

Valuation and view

* With the planned funding strategy, TTMT expects to 1) remain FCF positive in both companies, 2) reach EPS breakeven in two years, and 3) repay the acquisition debt in four years.

* While there is no doubt that this acquisition will provide scale and tech access to TTMT’s CV business, it comes with its own risks, such as: 1) uncertain macro backdrop in Europe that is reflected in the downward revision of Iveco’s growth guidance for CY25, 2) the scale of the transaction may lead to unnecessary financial stress on the balance sheet until it is well integrated, and 3) Iveco’s stock has doubled in the last 12M, which means that the acquisition is not inexpensive.

* We refrain from incorporating the Iveco financials into our numbers at this stage as we await more clarity on the deal.

* We reiterate our Neutral rating on TTMT given the current headwinds at JLR.

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