Suzuki Motor share price down, to buy back Volkswagen’s stake after arbitration ruling

Japanese car maker Suzuki Motor Corp said on Sunday it would buy back a 19.9% stake it sold to Volkswagen AG in 2010 after an international arbitration court granted it an exit from a fruitless tie-up.

A classic example of a failed partnership in the car industry where complex supply chains and differences in management and national cultures have ruined many tie-ups, the ruling by the London Court of International Arbitration puts an end to Suzukis four-year efforts to force the German auto maker into selling back its Suzuki stake.

The decision highlights the obstacles in front of second-tier auto manufacturers which lack the financial power of top players. Although Suzuki has a strong presence in Asia and a dominant position in India through its Maruti Suzuki venture, it lacks global scale, something which it sought to achieve through its partnership with Volkswagen.

When the two companies engaged in a tie-up, the Japanese firm hoped to receive access to Volkswagens advanced fuel-efficient technology, while the German car maker sought to fill up the missing pieces in its portfolio and tap Suzukis expertise in small cars, while gaining better access to India.

However, the twos relationship went sour shortly after the deal was struck in December 2009 with Suzuki accusing its German counterpart of seeking to control it and filing for arbitration in November 2011. In turn, Volkswagen stated that Suzuki breached their agreement by buying diesel engines from Italys Fiat SpA, which the Japanese company argued was not in violation of the terms.

And while the issue has been a headache for Volkswagen, it had a bigger impact on Suzuki, which has been forced to develop its own fuel-efficient technologies over the past two years. Investors, however, welcomed the decision, sending shares of the company jumping as much as 4.6% on Monday, before settling the day slightly lower which, however, still outperformed a 1.3% decline in the Nikkei 225.

Osamu Suzuki, the Japanese car maker’s 85-year-old CEO, said his company would exercise its first right to buy back Volkswagens holding at a reasonable price and that it wont seek any new partners soon. Suzuki sold the nearly 20% stake to Volkswagen for about $1.9 billion at current exchange rates, but it is now worth some $3.8 billion.

US activist investor Daniel Loeb, who this month revealed his Third Point fund held a stake in Suzuki, said the car maker should repurchase the stock at a price not too far from the current one and urged it to cancel the shares it buys back, saying it had enough cash and should avoid using equity.

Meanwhile, Volkswagen said it expects an earnings boost from the sale but added it would not know the effect on its balance sheet until the procedure has been coordinated. The court also partially upheld the German car makers claim that Suzuki had breached the tie-up agreement. Suzuki said it might have to pay related damages to Volkswagen but added that would likely have no impact on full-year earnings.

Volkswagen AG traded 1.23% lower at 169.25 euros per share at 09:37 GMT in Frankfurt.

Suzuki Motor Corp settled 0.53% lower at 4 129.5 yen per share on Monday in Tokyo, marking a year-on-year jump of 22.14% and valuing the company at 2.33 trillion yen. According to the Financial Times, the 18 analysts offering 12-month price targets for Suzuki Motor Corp have a median target of 4 100 yen, with a high estimate of 4 700 yen and a low estimate of 3 640 yen. The median estimate represents a 0.71% decrease from the last price of 4 129.5 yen.