Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the November 7, 2006 issue of the Bangkok Post.
By Oranuch Tritrungtusana
This is the first article in a four-part series, entitled Inside Automotive. In this article, we will look into both global and local merger and acquisition trends in the automotive industry over the past 18 months.
What automotive industry M&A activity did we see in 2005 and the first half of 2006?
Globally, we saw trade buyers return to making deals with smaller bolt-on and specialist acquisitions. We also saw private-equity buyers favouring niche investments, which usually generate steady cash flows. Favourable financing conditions fuelled one of the largest buy-outs in history, Hertz from Ford. Concurrently, we saw a number of private-equity firms grappling with the problems that unforeseen cost increases have caused. In Thailand, JVs with larger companies providing technology or new products or services still seems to dominate most activity.
Which regions were the most active in M&A during this period?
Europe maintained its status as the most active region for automotive M&A, while Asia continued to live up to its promise as the new source of consolidation. In particular, Chinese and Indian companies, buoyed by booming home markets, cash reserves and favourable ratings, are either picking up bargains among Europe's distressed automotive assets or entering the fray in competitive auctions.
Did we see the continuation of big vehicle manufacturer mergers, as we have in past years?
No. The days of big mergers between vehicle manufacturers (VM) are over as VMs prefer co-operation and the development of shareholder agreements with their rivals. The problem is that megadeals failed to deliver the anticipated synergies and address the central problem facing the industry _ overcapacity.
Have there been any major developments in the components sector?
Globally, the big development in the component sector in the last 18 months has been the re-emergence of trade buyers. In the first half of 2006, the five largest deals were all undertaken by trade players: Tesma International by Magna International, SAIA-Burgess Electronics by Johnson Electric Holdings, FTE Automotive by PAI Partners, BERU by BorgWarner, and Engel Equipment by Valeo. In 2005, there was a significant increase (20%) in deal volume, although total deal value rose more slowly. Nevertheless, little activity has been noted in the component sector in Thailand.
Which component sector trend is likely to continue?
The area that is likely to continue developing is distressed M&A linked to the restructuring of some of the big names in the US component sector.
Will the volume of deals in emerging markets continue to increase?
Yes. While the top 10 deals (by value) do not reflect this, the interest we are seeing in auctions in the mid-market is substantial. Indian groups are particularly targeting Europe, while Chinese groups are potentially attracted by North American assets, where supply lines are shorter and the obsession of the Big 3 (GM, Ford and Chrysler) with securing low-cost supplies plays to their strengths. While the deal value associated with these moves is currently quite small, this is likely to change over the coming years.
What about the retail, aftermarket, rental and wholesale sectors?
This conglomeration of these sectors saw a boom in deal value in 2005, via the $15 billion buy-out of Hertz from Ford by a consortium of private-equity investors. At the time, this was the second-largest buyout in history.
Where does the interest of private equity lie?
Interest from private equity has increased most significantly in the aftermarket sector. Indeed, the leveraged buyouts of Hertz and Europcar, pushed up the overall value of global M&A in the automotive sector through 2005 and the first half of 2006. It also highlights the push by many private-equity firms towards larger and larger deals. While private equity has by no means abandoned the mid-market, most players are very selective.
Which regions should we keep our eyes on?
Emerging markets are providing some of the most interesting growth stories, as companies benefiting from rapid growth in Asia eye acquisition opportunities in Europe. Chinese firms are looking at distressed situations, such as the acquisition by Nanjing of MG Rover, while Indian VMs are becoming a force to be reckoned with.
What is the outlook for Thailand's automotive sector in 2007?
More and more, Thai companies appear to be interested in other markets. This seems to be driven by concerns to stay competitive and expand services to customers. While most of the talk is on China and India, opportunities closer to home are more likely in the near future.
