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Sunday, 20 August 2017 10:20

Despite concerns over sales, auto suppliers remain active in M&A, experts say

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Illustration by Rachel Harper Illustration by Rachel Harper

As the pace of technological change intensifies for the automotive industry, suppliers are turning to acquisitions to reshuffle their businesses and prepare for the road ahead.

Suppliers are scooping up businesses and technologies that will give them a competitive edge as trends including electrification, lightweighting and autonomous driving become more ubiquitous. At the same time, companies also are looking to shed business units that may not fit with their core processes or the technology-driven future of the industry.

“You have suppliers that are looking deep to plug strategic gaps that they want to fill or, in the case of divestitures, businesses that they don’t want to be in and they don’t see in their long-term strategic view so they’re getting out,” said Mike Wall, Grand Rapids-based director of automotive analysis at IHS Markit. “I would hazard to say that that’s taking the lion’s share of the activity right now.”

Staying competitive among ever-increasing technological advancements is one of the primary reasons why Grand Haven-based Shape Corp. is considering acquisitions. The manufacturer of a variety of structural components for automotive bodies is scouting for deals that could help it gain a foothold in high-tech materials such as aluminum. Meanwhile, the company also is considering divesting in other areas of its business.

“We look at (M&A) in terms of changing the business for lightweighting,” said Jeff Piper, vice president of strategy and innovation at Shape Corp. “Are there opportunities that we should be looking at, and then should we be looking to maybe part ways with older businesses? Lightweighting (and) aluminum is a trend, so what can we do to grow into that (since) our value stream in that part of the business is pretty limited right now?”

Global automotive M&A data for the first half of 2017 seem to bear out those trends, according to a recently released report from PricewaterhouseCoopers. Year over year, deal value increased 14 percent to $24.4 billion during the first half of 2017. Likewise, deal volume also rose in the first half of 2017, reaching 276 closed transactions, a nearly 7.4-percent increase from the first half of 2016.

In some cases, large suppliers of batteries and other electronic equipment are looking to acquire vendors as a way to secure long-term access to raw materials amid skyrocketing competition.

“Some of the raw materials that we have — the lithium, the cobalt, the nickel — that’s something that we’re looking at in different areas of the world,” said Nick Kassanos, president of Holland-based LG Chem Michigan Inc., the North American battery division of South Korea-based conglomerate LG Electronics Co. “Where traditionally you’d be looking at Japan or Korea, we’re looking now in Africa and South America. As electrification becomes more popular, we’re going to have more pressures. It’s a dog-eat-dog world out there. Everybody is going to be playing in that arena.”

OPINIONS DIFFER

The current state of the automotive market coupled with the underlying economy has led the financial industry and automotive analysts to differing outlooks for OEMs and suppliers.

With many forecasts predicting a downturn in vehicle sales, many investors on Wall Street have turned bearish on the automotive industry, according to Wall. Yet, the availability of capital, suppliers’ appetites for dealmaking and general optimism about the overall economy have kept the pace of deals flowing.

“When I talk to investors out in New York, they’re all skittish about the state of the U.S. cycle, especially hedge funds that are looking at stock,” Wall said. “On one hand, you do have in this mood and tenor an investor sentiment that’s a bit bearish on autos in general … but then I could go on another call where we’re talking about PE and operational types that still want opportunity. It’s an interesting contrast.”

Primarily, industry watchers cite the favorable lending market, aging business owners looking to sell their companies and general optimism among the business community as driving deals so far this year.

“We’ve seen the stock market rise significantly in the last eight months,” said M&A attorney Tracy Larsen, a partner with Honigman Miller Schwartz and Cohn LLP, a Detroit-based law firm with offices in Grand Rapids and Kalamazoo. “Most all manufacturers that report on such things have indicated that growth is an important priority for them, and the fastest way to grow is through acquisition. The other thing that supports the strength of the market is the money available for deals.

“It’s not just that these strategic buyers have strong balance sheets currently — which they tend to do — but we also have significant private equity activity in the manufacturing space with significant dollars to deploy. We have very low interest rates to help finance transactions so that creates a very robust demand in the marketplace.”

Both Wall and Larsen believe deal flow in the second half of 2017 will remain on par with the volume in the first six months of the year.

“I think it will continue to be very strong throughout 2017,” Larsen said. “It’s a very robust market, and sellers are taking advantage of that market to achieve favorable valuations. Any seller that is considering a sale in the next couple of years has to be looking right now at going to market to take advantage of the favorable seller climate.”

FINANCIAL BUYERS RETURN

After a brief cooling off period, financial buyers also have started to ramp up investments in the automotive sector.

Financial buyers represented 65 transactions valued at $7 billion during the first half of 2017, which compares to $6 billion in 74 deals in the first half of 2016, according to the PwC report.

According to the PwC report, dealmaking among financial buyers peaked in the first half of 2015 with 85 deals valued at $11 billion. The majority of financial transactions — roughly $6.6 billion of the $7 billion in deals involving financial buyers through the first half of 2017 — originated from Asian countries.

Closer to home, Wall of IHS Markit has seen private equity firms become more interested in the automotive sector, particularly as valuations are “getting back into saner territory.”

“We saw valuations really climb as we went through the peak of the market,” he said. “Now that we’re at peak and declining a bit, we’re starting to see some of those valuations cool a bit. They’re still probably a bit high in some cases, but largely I’m seeing some of those valuations coming down a little bit, which is starting to bring some of the private equity players back off the sidelines.”

The PwC research shows a steady decline in deal valuations over the past two years. Average multiples were 10.3 times EBITDA (earnings before interest, taxes, depreciation and amortization) during the first half of 2017, down from 10.8 times EBITDA in the first half of 2016 and 12.7 times EBITDA in 2015, according to the report.

Local sources noted the multiples listed in the report are higher than what they’ve seen in West Michigan.

Still, Larsen at Honigman believes valuations for automotive companies are relatively high.

“Auto is still a very robust market,” Larsen said. “That is one segment where valuations have taken a half of a step down, but they tend to still be strong based on historic averages. The reason is that buyers are building into their valuation an expected decline in the upcoming years in auto. They think that the cycle has crested the top and will go into a decline. That said, the valuations remain very strong compared to average valuations.”

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