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Eicher Motors closes in on Ducati; to make a binding bid of $1.8bn
Date: 08/09/2017

After taking Royal Enfield and its cult Bullet motorbikes to top gear of machismo appeal and global profitability, Siddhartha Lal led Eicher Motors is revving up to make a binding offer to acquire the iconic Italian superbikes Ducati for $1.8 billion-$2 billion -- a move, of successful, will further power its portfolio, brand equity, global reach and access to technology, said multiple sources aware. Eicher, believed to be the only Asians left in the fray in the ongoing auction for the Ducati disposal, is currently finalising financing and structuring terms with a clutch of global banks and consulting companies ahead of the deadline, that was scheduled for this month end, added the sources mentioned above. Since earlier this April, embattled German auto major Volkswagen Group (VW), whose Audi division controls Ducati – maker of the "naked muscle bikes" like Monster – has been working with boutique investment bank Evercore to sell the brand for around €1.5 billion, valuing it at 14-15 times its earnings before interest, taxes, depreciation and amortisation (EBITDA) of about €100 million, people aware of the matter said, to help it fund a strategic overhaul following its emissions scandal. The divestment plans had reportedly triggered interests from a diverse set of potential suitors, including Harley Davidson, Suzuki, home grown Bajaj Auto and Hero MotoCorp Ltd as well as private equity buyout funds like KKR and CVC Capital Partners. THE UNION BUMP The process however has received a temporary setback after Volkswagen's German trade union opposed the sale process, arguing the Ducati business has little synergy with the rest of the core operations of the sprawling global activities and an internal rifts in strategy, Reuters reported Tuesday citing sources. Labour leaders at VW, who hold half the seats on the 20-member board, have strongly opposed a sale regardless of price forcing VW to inform five bidders to hold off making binding bids for Ducati, the report added. The final decision to sell the 91-year old business, which is based in the Borgo Panigale district of the northern Italian city of Bologna, needs to be approved by VW’s supervisory board that is due to meet on September 29th. "The dilligence is on hold for a fortnight. It's more an issue in Germany ahead of election season. It's a pause and hopefully not a dead end. With sprawling global operations, hopefully dilligence can still continue in other centres and markets. Preparations at Eicher is still ongoing. They have qualified in the initial rounds and will compete aggressively," said an official directly involved. An Audi spokesperson declined to comment on ET's detailed questionnaire saying it is market speculation. Mails sent to VW Group, Ducati and Eicher spokespersons did not generate a response till the time of press. Several attempts to reach Lal, MD & CEO of Eicher Motors remained unsuccessful till press time. Just like Eicher, Ducati -- whose racers have won the Superbike world championship 14 times, with Carl Fogarty and Troy Bayliss being the most successful -- is also hot on the wishlist of PE groups Bain, PAI Partners, Italy’s Benetton family and the former owners Investindustrial that had bought a stake in Ducati before the financial crisis, subsequently taking control of the business before selling it to Audi in 2012. Interestingly, unconfirmed reports also suggest US automotive firm Polaris Industries too has made the cut. Even though Polaris and Eicher have a 50:50 joint venture for personal utility vehicles, they are not bidding together for Eicher. Some analysts also feel if Bain makes the cut, they could also rope in Hero subsequently. Eicher Motors closes in on Ducati; to make a binding bid of $1.8bn ON FIFTH GEAR With the Eicher management focussed on driving growth momentum of Royal Enfield sales in India as well as developing and leading in the mid size motorcycles market globally, the company has been looking at expanding its global footprint especially in the Americas after making inroads in parts of Europe and Australia. From Sao Paolo to Barcelona and London, it has also opened a dozen exclusive stores in the last as many months. Sales have grown 31% in the last fiscalas well touching all time best numbers, making it arguably one of the best periods in the history of the Royal Enfield brand. In 2016, while Ducati sold 55,000 units worldwide Royal Enfield sold 6.5 lakh units in FY-17 and is racing towards 1 million units in the next couple of years, despite macro-economic challenges like the transition to BS IV or GST. "While Enfield makes large volumes in the 350-500cc segment, the Italians are into superbikes with engine capacity between 800cc and 1,200cc. This is a trophy asset and perfectly compliments Lal's global vision. Imagine the symbolism: An Indian powerhouse owning the world's most iconic high performance," said a Delhi based consultant involved directly on condition of anonymity. Ducati was launched in 1926 as a maker of vacuum tubes and radio components and its Bologna factory remained open in World War Two despite being the target of several bombings. Another person close to Eicher said while the brand Royal Enfield is very strong, there is still a significant quality gap between them and some of the premium motorcycles around the world. "Royal Enfield can clearly gain on the premium end of the market and get access to high end and sophisticated technology if it looks to buy Ducati, especially on the engine front. Plus it can also diversify the portfolio, with different genres of bikes in addition to its core of a cruiser and laid back riding...The price though quoted by Ducati appears a little expensive," he added. "It is not just about buying the brand, it is about how are you going to build the brand after bringing it on board. It is the facets of brand, design and customer experience which are critical and sometimes they are very difficult to value," argued V G Ramakrishnan, MD, Avanteum Advisors, a consultancy firm. A successful deal for Ducati, which last year made revenues of €721 million, would show that Volkswagen boss Matthias Mueller is serious about reversing his predecessor’s quest for bulking up the portfolio through mega M&As. "VW is looking at valuations that reflects multiples of similar trophy assets like Ferrari which trades at almost 30 times its forward earnings. Lal will stretch but doubt if he will overpay," said an investment banking source not directly involved.

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