NEW DELHI, 28 September 2006 – The automotive sector saw private equity firms dramatically shift their focus from component suppliers to the aftermarket in the last year, according to a new report issued today by PricewaterhouseCoopers. They are now clearly favouring niche investments with more defendable positions and which traditionally generate reliable cashflows.
As predicted by PricewaterhouseCoopers in 2005, there has been reduced private equity interest in the manufacturing side of the auto business. Rising material costs have made it more difficult for these capital-intensive businesses to generate the cash needed to service debt. This is particularly evident in the components sector, where private equity-backed deals now represent just 15% of the total value, down from 30% in 2005 and 61% in 2004.
The report also looks at how the automotive industry has experienced the re-emergence of trade buyers. Following an all time low level of interest in the previous two years they have returned to the market, this time looking for bolt on or specialist acquisitions. They made their most triumphant return to the components sector, undertaking all five of the largest deals in the first half of 2006. While this return helped drive deal numbers up 20% in 2005, average deal size actually fell slightly.
However, this does not mean a return to the days of the mega-merger. Instead, major vehicle manufacturers are using M&A to restructure business through bolt-on acquisitions and sales of non-core activities.
Deepak Kapoor, executive director and transactions leader, PricewaterhouseCoopers Pvt. Ltd. said, “On the M&A front the Indian companies buoyed by booming local market and good cash reserves are looking at enlarging their global foot print by picking up either distressed automotive assets or entering the fray of competitive auctions to increase their share of supplies to global OEM's.”
As per the report, vehicle manufacturers see vehicle design, manufacturing and distribution as core functions but all other activities are up for sale at the right price. In this new climate, private equity buyers have gone from being viewed with caution to being the buyers of choice.
While the components sector is a key area for M&A, the adage ‘buyer beware’ has never been more apt. Deal valuations for similar sized businesses vary widely, based on differing future prospects. This presents buyers with a real challenge in assessing a value that avoids overpaying without leaving the door open to counter-bids.
Emerging markets have proved to be areas of growth. “Cash-rich Indian vehicle manufacturers have been using their ability to source components more cheaply than Western rivals to gain a competitive advantage in bid situations. Overall, deal numbers are steadily increasing, particularly in mid-sized deals where Chinese firms are focusing on American assets, while Indian firms look to Europe. While these deals are currently small, this is expected to change in coming years”, adds Deepak.
Hedge funds have been taking advantage of the distress many components companies find themselves in to buy into the sector. Fund managers have been snapping up bargain debt and distressed equity from banks and becoming catalysts for change in some cases. Hedge funds have already spurred debt and equity write-offs in some automotive firms. Judging by their actions in other industries, they may drive more radical management changes by bringing in turnaround specialists or even forcing the break-up of some businesses.
Europe
Europe remains the most active region for M&A as the large manufacturers focus on core activities and look to dispose of non-core assets. In the UK and more widely across Europe, consolidation in the retail sector is expected to continue. However, the more fragmented nature of the continental European retail sector is likely to mean that, despite an acceleration in deal numbers, volume will remain fairly modest for the next five years or so.
US
The US has seen lower corporate activity because of well-publicised problems at the big three manufacturers. Distressed M&A in the US components sector is likely to be the growth area as some of the industry’s big names restructure and Korean, Chinese or Indian players could emerge as real movers and shakers. They have fast growth and a hunger for new technical expertise and customer relationships that could make acquisition opportunities hard to resist.”
ENDS
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