DATE: 25 September 2006
CONTACT: Philip Wylie, PricewaterhouseCoopers LLP
Tel: 020 7212 4871, Email: philip.wylie@uk.pwc.com
OR: Kristina Blissett, PricewaterhouseCoopers LLP
Tel: 020 7212 5133, Email: kristina.blissett@uk.pwc.com
DRAMATIC PRIVATE EQUITY SHIFT IN AUTO DEALS
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 LLP. 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.
Philip Wylie, Automotive Corporate Finance Leader, PricewaterhouseCoopers LLP said:
“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.
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.
Philip Wylie, Automotive Corporate Finance Leader, PricewaterhouseCoopers LLP said:
“Hedge funds have already spurred debt and equity write-offs in some automotive firms. Judging by their actions in other industries, we could see them 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.
Philip Wylie, Automotive Sector Leader, PricewaterhouseCoopers Corporate Finance, said:
“Emerging market groups are likely to become significant players in the US and Europe before long. They have fast growth and a hunger for new technical expertise and customer relationships that could make acquisition opportunities hard to resist.”
ENDS
Notes to Editor
1. For more information on PricewaterhouseCoopers automotive practice and to download a copy of Auto Insights visit www.pwc.com/auto
2. The Corporate Finance teams within the member firms of PricewaterhouseCoopers International Limited have more than 800 corporate finance specialists in more than 60 offices in key centres throughout the world. In 2005, PricewaterhouseCoopers International Limited advised on over 350 M&A deals globally, valued at over $45 billion. Services include advice on disposals, acquisitions, private equity transactions, privatisation, corporate and project finance. Industry teams include Consumer Products, Financial Services, Business Services, Energy and Utilities, Industrial Products and Technology, Media and Telecoms. For the fourth year running, according to Thomson Financial, PricewaterhouseCoopers is the UK’s leading M&A adviser for transactions between $50m and $500m, having advised on a higher volume and value of mid-market deals than any other adviser in the UK in 2005.
3. PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130 people in 148 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.
“PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
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