The recent and sudden downturn in the automotive industry is likely to lead to a flurry of bankruptcies and sell-offs by distressed suppliers, not unlike what the industry witnessed on the heels of the Great Recession.
Dietmar Ostermann, partner and U.S. Automotive Advisory Leader for PricewaterhouseCoopers in Detroit, spent time at the recent Center for Automotive Research Management Briefing Seminars to pick through the numbers that all but promised plenty of dealmaking among auto suppliers.
Ostermann and PwC considered roughly 10 percent of suppliers to be in a position where they are able to buy. Another 45 to 60 percent of middling suppliers are below those prospective buyers, with the remaining 30 to 45 percent of suppliers considered to be at a medium to high risk of bankruptcy.
“There is a big base in the middle that will probably do nothing and can do nothing,” Ostermann said. “Then there is a bottom area that is medium or high risk where we believe these suppliers will either go bankrupt or sell the entire company before bankruptcy or will sell certain assets in order to avoid future liquidity crunches. That will be quite a bit.”
Over the next 18 months, Ostermann forecasts that the North American region will see anywhere from five to 10 deals involving distressed automotive companies or large suppliers totaling $3 billion to $7 billion in value. Over the same period of time, he is expecting 15 to 25 deals in Europe totaling up to $12 billion in value and also 60 to 100 deals for $20 to $25 billion of total value in Asia.
The industry dynamic is similar to the M&A-heavy period that followed the Great Recession. After that dramatic market downturn, global auto supplier M&A activity was bustling with 278 deals in 2010 for nearly $88 billion in value, which crept up to 303 deals for more than $90 billion in value in 2011.
Since 2015, the activity has settled to roughly 150 to 200 deals each year globally, but that is expected to spike in the year following the COVID-19 pandemic-induced downturn.
The number of deals could reach around 216 by the end of 2020 and then eclipse 250 deals in 2021, according to Ostermann.
“There is pretty significant activity ahead,” he said.
Local suppliers to follow suit?
This same high-level assessment is likely to ring true for local Tier 1 and Tier 2 suppliers, in addition to manufacturers that support the automotive industry, according to Laurie Harbour, president and CEO of Southfield-based manufacturing consulting firm Harbour Results Inc.
“I think there will be a lot of consolidation and I think there will be a lot of people in the private equity and financial spaces buying up companies,” she said. “COVID didn’t kill those companies and so they’re all still out there and they’re going to be looking for people that can buy and acquire at a fair price.”
At the CAR Management Briefing Seminars, however, Ostermann laid out that the automotive industry was one of the hardest hit by the current downturn, which is reflected in lower valuations and multiples that have significantly declined since the first quarter of 2019. Low valuations, paired with aging company owners, don’t exactly lend much bargaining power.
“Unfortunately, (those companies) that are not in a good position can’t command a high price. These are owners that thought someday they would go out on top with a lot of money in their pockets and unfortunately I’m not sure that’s going to happen,” Harbour said.
“Imagine a 60- or 70-year-old person who didn’t sell when they should have sold and someone comes around and offers them an out now,” she added. “You’re going to see a lot of people take that. If they don’t, they should.”
Still, a segment of owners might be willing to tough it out to avoid selling at a discount.
Max Friar, managing partner at Grand Rapids-based M&A firm Calder Capital LLC, recently worked with a couple clients in that exact situation.
These clients included a trucking company with primarily Tier 1 suppliers as customers and a metal stamping company with significant automotive customers.
With the recent market downturn levying significant blows to the valuations of these businesses, their respective management teams simply pulled their companies off the market instead of selling at a discount.
“(Buyers) are facing a lot of sellers, just like they did in 2009 and 2010, that are thinking ‘I don’t want to take a discount on the value of my business,’” Friar said. “‘I’d rather wait it out and see if I can hunker down and see if I can get through this.’”
The number of distressed suppliers and manufacturers could be far worse, as Ostermann pointed to government assistance and forgiving banks as two effective lifelines for ailing businesses.
“The difference in this market downtown is the government response,” Friar said. “While people might debate how effective negotiations are right now, I thought initially it was ridiculously fast and appropriate. Nothing like that happened in 2009 — not that quick or effective.”