Suzuki plans $1.8-bn bond sale to fund Gujarat factory

Suzuki motor logo (Photo: Wikipedia)
Suzuki Motor Corp is building a war chest to strengthen its footprint in India - its largest market. The Japanese automaker plans to sell 200 billion yen ($1.8 billion) of convertible bonds and cancel most of the stock it bought back from Volkswagen last year, as the Japanese automaker expands in India following a failed alliance, says a Bloomberg report.

Suzuki will sell the bonds primarily to fund the $2.8 billion (Rs 18,774 crore) factory it's building in Gujarat, according to a statement filed to the Tokyo Stock Exchange on Monday. It will also cancel 70 million treasury shares, or 12.5 per cent of outstanding stock, to boost returns for investors after ending its partnership with Volkswagen in September.

President Toshihiro Suzuki, who took over from his father and Chairman Osamu Suzuki in June, has been under pressure to expand in India as well as reward shareholders who lost out on value because of the Volkswagen alliance. Daniel Loeb, whose hedge fund Third Point LLC bought a stake in the carmaker in August, said Suzuki should cancel all Volkswagen stocks.

  • Suzuki to sell $1.8 bn convertible bonds to fund $2.8-bn mega factory in Gujarat

  • Cancels most of the stocks it bought back from Volkswagen; it acquired 111.6 mn shares from the German company

  • Maruti has a contract manufacturing agreement with Suzuki for the Gujarat plant - Suzuki to sell products on a no-profit-no-loss basis

  • Gujarat plant to have production capacity of 250,000 cars per annum

  • Three of six assembly lines to become operational in 2017

  • Maruti said the arrangement will bring Rs 8,000-Rs 10,000 cr FDI to India at zero cost

Suzuki acquired 111.6 million shares from the German automaker last year. The Japanese company said on Monday that it will hold a maximum of 50 million treasury shares, mainly to exercise the convertible bond sale.

Maruti Suzuki, the Indian subsidiary of the Japanese automaker, has a contract manufacturing agreement with its parent for the Gujarat plant. As per the agreement, Suzuki will sell products (from the Gujarat plant) to Maruti on a no-profit-no-loss basis. The proposal for contract manufacturing was put to vote before the shareholders last year. Almost 90 per cent of the 65.8 million votes cast were in favour of the resolution. The voting result came in December. The proposal had to be put to vote as it was a related-party transaction.

The Gujarat plant is supposed to have six assembly lines, each with a capacity to produce 250,000 cars per annum. In the first phase, three assembly lines are expected to become operational in 2017. Maruti said the arrangement will bring foreign direct investment between Rs 8,000 crore and Rs 10,000 crore to India at zero cost.

As it did not invest in Gujarat, Maruti is sitting on a cash pile of over Rs 13,000 crore. The company, which aims to increase its annual sales to about two million units by 2020, will invest Rs 15,000 crore over the next five years in procuring land for doubling its dealership network and expanding stockyard, warehouse and transportation infrastructure. Maruti sold 1.1 million vehicles last year. The Delhi-headquartered company, promoted by Suzuki, has a dealership network of over 1,700 outlets at present. The convertible bond deal is Japan's biggest since November 2011, according to data compiled by Bloomberg.

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