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Sunday, 06 December 2015 22:15

Auto supplier M&A expected to ‘thrive’ in 2016

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Mergers and acquisitions among global automotive suppliers should maintain the robust pace they reached in 2015 as the industry heads into the new year.

That’s according to Ernst and Young’s recent Automotive Capital Confidence report published in November in which executives said they expected the global M&A market to “thrive” into 2016.

While pent-up cash and surging production largely fueled deals among automotive suppliers over the last two years, industry insiders expect this next wave of M&A activity to be driven by companies adding new technologies and capabilities to meet the demands of their OEM customers and regulators.

Of the executives polled for the EY report, 85 percent expect the global automotive M&A market to improve over the next 12 months, while 59 percent expect to make an acquisition of their own over the next year.

“The pace of deals is strong … We’re in this phase in the industry where volumes are still strong here, but you have companies that are really trying to find their way from a strategic perspective,” said Mike Wall, an analyst with IHS Automotive. “Everyone is trying to build to meet production, but they’re looking 10 years down the road and seeing how to position themselves, whether that’s electrification or with automakers shifting production.”

For example, Muskegon-based Port City Group’s merger with Arkansas-based Pace Industries in July shows how manufacturers conduct deals to meet the needs of automakers who are pressuring their supply chain partners to establish operations in foreign markets.

At the time the deal was announced, Port City CEO John Essex told MiBiz the merger positioned the company to better supply its customers in Mexico, which make up roughly 25 percent of its $140 million in annual sales. Prior to the merger, Port City had considered developing a greenfield site in Mexico, but the supplier didn’t want to “sit there with a balance sheet full of debt.”


POSITIONING FOR TECHNOLOGY

Industry insiders also predict that companies will ramp up M&A activity to acquire key fuel-savings and electrification technologies to remain competitive in the marketplace.

That push yielded the largest deal so far in 2015 when German auto supplier ZF Friedrichshafen Ag acquired Livonia-based TRW Automotive Holdings Corp. in May for $13.5 billion in cash and debt, according to a report in Automotive News. The deal created the second-largest automotive supplier with sales of more than $35 billion.

More recently, Auburn Hills-based BorgWarner Inc. acquired Remy International Inc. of Indiana for $951 million in cash, according to a July report in Bloomberg Business.

Executives from both ZF and BorgWarner cited adding key technologies to their portfolios — such as fuel efficiency systems and autonomous driving — as primary drivers for the deals.

Suppliers’ pursuit of new technologies has added fuel to the environment for M&A. Overall deal volume and value in the first half of 2015 increased over the same period last year, according to the 2015 Midyear Automotive M&A Insights report published by PricewaterhouseCoopers LLP (PWC).

Automotive manufacturers closed 276 deals in the first half of 2015, up 10 percent from the 250 deals closed in the first half of 2014. The overall deal value also increased 24 percent to $34.1 billion through midyear, according to the study. The authors noted that several large mega deals, such as ZF’s acquisition of TRW, drove the majority of transaction value growth in 2015.


REGIONAL OUTLOOK

While 2015 has thus far been dominated globally by mega deals, West Michigan has seen fewer large deals than in previous years, according to industry sources. Instead, small- to mid-size firms completed the majority of the transactions, a pattern that experts say will continue into 2016 in the region.

“Where I’m seeing a lot of activity is in smaller and entry mid-level suppliers where it might be part of a succession plan where the owners are looking to sell when the business is hot,” Wall of IHS said.

The same sentiment for smaller deals holds globally as well where automotive executives expect the majority of future transactions to be valued at less than $250 million, according to the EY report.

Small- to mid-sized companies are also increasingly being attracted to deals because of the pressure by OEMs to establish a global presence or to grow large enough to develop meaningful partnerships with companies that have a global presence, said Chip McClure, managing partner at Jackson-based private equity fund Michigan Capital Partners LLC.

“You need to have some kind of ability to consolidate directly or indirectly with these companies so that you’re not just Michigan-focused,” McClure said.

As deals progress into 2016, there’s also evidence that the market is tipping closer to an equilibrium between sellers and buyers after favoring sellers for the last several years. While deals among manufacturers had fetched double-digit multiples of earnings before interest, taxes, depreciation and amortization (EBITDA), current multiples range from the mid- to high-single digits, McClure said.

“There is some realism coming in, but there is still some frothiness in the market,” McClure said.

While the market may be equalizing, it still favors sellers for the time being, especially in West Michigan, according to McClure.

“Bottom line: There is no shortage of investment opportunities in West Michigan,” McClure said.

Read 7475 times Last modified on Wednesday, 16 December 2015 00:05

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