Strategic and private equity automotive buyers, flush with cash, are certainly prowling for attractive-valued automotive supplier assets, but they are cautious about pulling the trigger in uncertain economic conditions.
About a dozen automotive suppliers – among them Mark IV Automotive, J.L. French Automotive Castings and Schrader Electronics – are up for sale, and buying interest is high, especially among private equity firms. But as most of them are generating upwards of US$50m in EBITDA, the sellers’ asking prices will require buyers to seek financing, a substantial burden in a weak economy.
Most private equity firms do not want to pay over five to six times EBITDA for a given automotive company. In recent private sector deals, such as the US$285m purchase of Canadian oil pump manufacturer Stackpole International by The Sterling Group and Current Capital in August, the target was valued at roughly that amount, according to a Churchill Financial Group report. But many sellers will demand higher multiples.
Debt financing has become more expensive in recent months, with spreads widening by 100 basis points from early August, when the last major deal was done.
One potential automotive transaction has already been called off, and another, as of this week, is reportedly facing trouble. According to a 22 November Reuters report, UK-based TI Automotive, which began its sale process with Lazard and Deutsche Bank last month, has lost its top bidder, Carlyle, due to the firm’s failure to obtain sufficient debt financing; other buyers are likely to be scared off for the same reason. Last month, Cooper-Standard announced that it was discontinuing its sale process due to the weak economy.
Other strategic groups looking to sell may decide to stay independent as well, though at least one – Mark IV – is staying the course, according to Chief Executive Jim Orchard, as it has already received bids from a few Tier 1 automotive groups and financial buyers.
Many of these deals began their sale process early this year, before stock prices tumbled and financing costs rose. Now, they are plagued by the choppiness of the financing markets, as well as the decline in companies’ valuations amid the broad market downturn and difficult leveraged finance markets.
Debt financing has become more expensive in recent months, with spreads widening by 100 basis points from early August, when the last major deal was done. In the Stackpole deal, for instance, the second lien paper was done with an 8.5% yield that has recently traded closer to 9.5%. There are also fewer banks willing to underwrite such transactions.
Given that only one deal has officially slipped through the cracks so far, the pipeline for deal activity in the automotive parts industry is likely to remain robust.
Still, given that only one deal has officially slipped through the cracks so far, the pipeline for deal activity in the automotive parts industry is likely to remain robust, as many of the companies up for sale have received heavy investment over the last two or three years from hedge funds, who are now looking for an exit strategy. However, sellers expecting high valuations may have to settle for that five to six times EBITDA multiple range.
The deal environment for automotive parts M&A is attractive right now after the widespread restructuring across the industry in recent years, says Arthur Baines, a consultant in the Financial Economics Practice at Charles River Associates. Despite near-term uncertainty about the pace of the recovery, US vehicle sales have risen to around 13 million units after falling during the recession, and are expected to hit 16 million units by 2015. More consumer lenders are returning to the market, Baines adds, and the availability of this credit will support industry consolidation.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Sam Weisberg is Mergermarket’s North American automotive correspondent. Naureen Malik is a New York-based reporter for Dealreporter, the group’s live deals product. www.ft.com/mergermarket
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