A grab for corporate disposal and private equity-backed automotive supply assets in Europe is under way. US Tier 1 suppliers would do well to target acquisitions while conditions remain favourable, or risk losing more prized technologies to local or foreign buyers like GKN, which acquired Getrag’s axle business last month.
Johnson Controls, Delphi, BorgWarner and Cooper Standard are all thoroughly financed and in the enviable position of being able to be more aggressive. Johnson Controls has acquired injection mouldings technologies in Germany, control systems in Spain and seating technology in France. Delphi could use some of its US$1bn in IPO cash proceeds for acquisitions. BorgWarner bought traction systems in Sweden while Cooper Standard bought hard coating specialist USi from Japan’s Ikuyo earlier this year, though Cooper’s chief executive’s aim to pursue “global platform opportunities” could include European acquisitions.
US Tier 1 suppliers would do well to target acquisitions while conditions remain favourable, or risk losing more prized technologies to local or foreign buyers
According to Mergermarket, automotive cross-border activity is on the up and the US is making headway in Europe, having completed 16 European automotive related acquisitions valued at €426m (US$608m) in 2010, compared to nine deals valued at €311m in 2009. In the first half of this year, US companies have completed eight deals in Europe achieving a 10% share of inbound European automotive M&A market, but are behind Europe’s 19.4% market share in US-bound acquisitions.
US automotive suppliers should be attacking the weak European financial sponsorship market now that there is uncertainty in the debt market due to the continent’s sovereign debt crisis. Financing for leveraged buyouts remains hard, worsening the outlook for serious financial buyout contenders in Europe. Debt availability has not dried up, but German exhaust technology specialist Eberspaecher, which raised a three-digit million sum from a banking consortium in August is looking elsewhere – expanding to BRIC countries and South Africa – having earmarked at least €80m for a new plant in Germany. No talk of European acquisitions here.
The US government’s new regulations for the reduction of fuel consumption and Europe’s engineering reputation among consumers should further drive US suppliers to be bold. From 2025 according to the CAFE (Corporate Average Fuel Economy) standard, US cars will have to run on no more than 4.3 litres per 100km. With quality engineering in vogue among US consumers – Chrysler already advertises with a German-engineered-technology-inside campaign for its Dodge brand to attract customers – all aspects of vehicle construction are desirable, especially those that can reduce fuel consumption. The US consumer is changing too, and wants fuel saving engines and small cars pioneered in Europe.
US automotive suppliers should be attacking the weak European financial sponsorship market now that there is uncertainty in the debt market due to the continent’s sovereign debt crisis.
Considerable gains can be made through US R&D investment, but it takes longer and there is an acceptance in the industry that niche research is a European affair, which is why GM won’t sell Opel (see last month’s entry), despite another round of potential layoffs. GM has reason to stay close to R&D hub Germany as it hails the arrival of Opel‘s electric car, Ampera, to which Opel engineers have contributed a substantial amount.
The European automotive M&A market is awash with private equity houses looking to cash out while industry fundamentals remain strong. Sponsors fear their assets have peaked as the outlook on consumer confidence darkens. According to Mergermarket, there are around 221 private equity-backed automotive suppliers in Europe, of which half have been held for a minimum of five years (a ripe time horizon for an exit) providing ample fodder for opportunistic buyers. Private equity backers with a limited pool of buyers may favour all-cash considerations from strategic buyers such as those from the US. While the door remains open for US suppliers to make a serious play for a wealth of European automotive supply assets, they should be careful not to jump through an open window only to land on a high priced supplier with little added value in a bidding war with foreign heavyweights. Their caution might not be misplaced after all, but conditions are in their favour.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Johannes Koch is Germany correspondent for Mergermarket EMEA. www.ft.com/mergermarket
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