Russia is expected to be such a rich market for Magna International Inc. that it will generate more revenue per vehicle than the company's long-established operations in North America and Western Europe do now, senior executives from the company have told analysts.
The value of Magna parts in the average Russian vehicle - an industry measure known as content per vehicle - could be as high as $1,000 (U.S.) when the parts maker's operations in that country hit their full stride, analysts said yesterday after hearing a presentation on Magna's Russian deal last Friday.
That's 20 per cent more than the average $832 in content Magna supplied on North American vehicles and almost triple the figure for western Europe in the first quarter.
The alliance with Russian Machines and its billionaire controlling shareholder Oleg Deripaska "gives us ability to leverage unparalleled business relationships in Russia," Magna said in the presentation to analysts, which gave no time frame for hitting the $1,000 figure.
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Vehicle production in Russia should reach 2.1 million vehicles by 2010, the presentation said, which would create more than $2-billion in revenue for Magna if its content were as high as $1,000 by then.
The main opportunities lie in metal forming, seating and interiors, engine and transmission parts and plastics.
The $1,000 content may be possible by 2012, Bank of Nova Scotia analyst David Tyerman said in a report to clients yesterday.
"We think this will take five years or more, as the company must identify opportunities, complete design, engineering and plant construction activities and secure financing," Mr. Tyerman said in the note. He raised his one-year target price for Magna's shares to $99 and his two-year target to $110 after hearing the presentation.
"Magna could get a significant jump on rivals through its tie-up with Mr. Deripaska," he wrote. "Mr. Deripaska should be able to help Magna accelerate growth by providing access to customers, resources (e.g. labour) and local capital and helping Magna navigate the local regulatory system efficiently."
The presentation by Don Walker, Magna's co-chief executive officer and Vince Galifi, chief financial officer, noted that Russia is crucial to the company's strategy of expanding in emerging markets.
Vehicle production is expected to grow by 50 per cent by 2010, incomes in Russia are growing, the middle class is increasing in size and the level of vehicle ownership is low at 177 for every 1,000 people.
The deal with Mr. Deripaska, in which he will invest $1.5-billion to buy 20 million common shares of Magna and gain six of 14 seats on the board of directors of a new entity that will control the auto parts giant, keeps start-up risks to a minimum, reduces time to market and provides a financially strong partner to enter the market, the presentation said.
As part of his investment, Mr. Deripaska will hold what amounts to a veto on non-automotive investments of more than $20-million, an issue that has dogged Magna chairman Frank Stronach since the late 1990s when Magna bought Santa Anita racetrack in California and looked at a range of other investments, including a luxury airline and a theme park in Austria.
A non-automotive investment of more than $20-million, raising debt of more than $500-million or an acquisition of $250-million requires approval by a two-thirds majority of the directors of the new company.
Magna shares fell $0.29 to $95.79 (Canadian) in trading on the Toronto Stock Exchange yesterday.
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