For Mahindra & Mahindra, the acquisition would pave way for entering into the two-wheeler business,

the area it has been looking at for some time now.

Putting up a greenfield project is much more expensive and time-consuming than acquiring a readymade firm like Kinetic Motor since it has been in business for over three decades. Besides, Kinetic
offers a full product portfolio ranging from mopeds to scooters to motorcycles, sources said.
Kinetic Motor, however, was incurring losses for some years now. The company had recorded a net
loss of Rs 18 crore in the fourth quarter ended March 31, 2008, slightly below from the third quarter of
the previous fiscal when it had posted Rs 19.75-crore net loss.
Kinetic Motor's promoters, the Firodia family, owns 54.83 per cent in the company. The firm needs
funds to revamp its operations and it was looking for raising anything between USD 100-125 million.

Mahindra & Mahindra's proposed acquisition of the assets of Kinetic Motor Company (KMCL) will not require an
open offer to minority shareholders of KMCL.
This is because the structure of the deal ensures that there is no change in management control of KMCL
although the main business of the company two-wheelers is being transferred to a new entity which will run
the two-wheeler business. M&M will hold 80% stake in the new firm against a payment of Rs 110 crore. This puts
the valuation of KMCL's two-wheeler business at Rs 137 crore. KMCL will hold the remaining 20% stake in the
new entity.

Sulajja Firodia Motwani, MD of KMCL, says the structure of the deal is value-accretive to KMCL shareholders.
KMCL, according to her, will utilise the proceeds of the transaction to retire its debt estimated to be around Rs 60
crore. The remaining part will be invested in KMCL which would utilise the money to foray into new ventures.

Also
The transaction, however, does not bring any immediate upside to the KMCL minority shareholders. They will get
dividends from the new company against their combined 20% shareholding in it. However, the transaction will
help KMCL emerge as a debt-free company and thereby, improve its capability to leverage its balance sheet for
new ventures. KMCL will be left with real estate assets worth Rs 30-40 crore, post-deal.
The question some minority shareholders might raise is whether KMCL should have sold a majority stake to
M&M. In that case, the minority shareholders would have had an exit option by subscribing to the mandatory
open offer from M&M.
Aswin Bhuwania, vice-president of Ambit Corporate Finance (advisor to KMCL), says it's a win-win deal. A banker
close to the transaction says given its current market capitalisation of Rs 45 crore and negative net worth, a
straightforward sale would have fetched KMCL far below the amount it is to get now from M&M through the asset
transfer route.
In the case of an outright sale of Kinetic Motor, M&M would have got control of KMCL's real estate assets which
is not the case under the proposed transaction. Also, KMCL shareholders will stand to gain in the long run if it
wants to pull out of the new company, says the banker. KMCL has the put option to sell its stake in the new
company to M&M after seven years. It is understood that the option price is "substantially higher" than the price
being paid by M&M now. However, there is no official word on this.
It is widely believed that M&M will induct a foreign equity partner into the two-wheeler firm in a year or so. In
addition, the new company will go for listing once it gathers the critical mass. "So, as things stand now, the
valuation of the new company will certainly go up. And KMCL will be one of the beneficiaries of this," said another
source close to the transaction. A top source at M&M says the new entity does not require immediate funds
infusion.
"We have sufficient internal generation. We can also meet working capital requirements by borrowing from
banks," he adds.

Some observers are not so certain about the success of the new company. Only time will tell whether M&M can
succeed in India's crowded two-wheeler market. However, the stock market has given a thumbs-up to the deal.
The KMCL stock on Thursday gained nearly 5%, the maximum permissible limit, to close at Rs 21.65. It gained
17.34% in a week.