NEW YORK (Reuters) - As the U.S. auto industry shrinks, companies that are under pressure will likely reach overseas deals to boost sales, while making domestic operations more efficient through small acquisitions.
By Megan Davies
NEW YORK (Reuters) - As the U.S. auto industry shrinks, companies that are under pressure will likely reach overseas deals to boost sales, while making domestic operations more efficient through small acquisitions.
Deals aren't likely to be the same size as those seen in the recent mergers-and-acquisitions boom since credit markets are effectively closed for large buyouts.
Instead, automakers and suppliers will seek to replace decreasing revenue on their home turf through tie-ups with companies in lower-cost countries, such as India and China, bankers and investors said at the Reuters Autos Summit in Detroit this week.
!ADVERTISEMENT!Automakers, already slashing jobs and factory production, are feeling reverberations from the housing market crisis, and will "have to get smaller faster," said Thomas Stallkamp, a partner at private equity firm Ripplewood Holdings LLC, which owns several auto parts makers. Stallkamp thinks U.S. auto sales could slump to a 15-year low next year.
But investors are still keen on the sector, and while automakers are not expected to disappear, they will have to globalize and adapt.
"Somehow, everybody will survive," said Stefan Jacoby, the chief executive of Volkswagen AG's <VOWG.DE> U.S. operations. "In our industry nobody dies. Have you seen Fiat <FIA.MI> dying, or Mitsubishi <7211.T> dying, or do you see GM <GM.N> dying, or Ford <F.N> dying? That's the very interesting thing about our industry. No one's actually disappearing."
Investment bankers have been racking up frequent flyer miles brokering deals overseas. Justin Mirro, head of the automotive and transportation group at Jefferies & Co, said of the 22 transactions it did this year in the automotive area, 20 involved an international component, and only two were purely domestic.
"Automakers have gone global," said Mike Macakanja, a director at Lazard. "The cost of developing advanced technology in any part of the vehicle is increasing, and suppliers are seeking to share that burden of technology development -- particularly in emissions and safety. A larger, more diversified supplier can bear that cost better."
Chinese and Indian companies, in particular, are becoming aggressive acquirers abroad as they seek diversification and growth.
Tata Motors Ltd <TAMO.BO><TTM.N>, which has a joint venture with Fiat to make premium cars for the Italian company, is interested in buying Ford Motor Co's <F.N> Jaguar and Land Rover operations, sources have told Reuters. India's Mahindra & Mahindra Ltd <MAHM.BO> is also interested.
In recent years, Wanxiang Group, China's top auto parts supplier, bought assets from Dana Corp <DCNAQ.PK>, the car and truck parts maker, while Hong Kong-based Johnson Electric Holdings Ltd <0179.HK> acquired an electric motor business from Lear Corp <LEA.N>.
Jerry York, a former GM board member and adviser to billionaire investor Kirk Kerkorian, thinks Chrysler LLC will ultimately be combined with an overseas player. Buyout firm Cerberus Capital Management LP <CBS.UL> led a group that bought Chrysler from Daimler AG <DAIGn.DE> earlier this year for $7.4 billion.
"My best guess would be that it is to fix up the company, get it back to profitability, and then merge it with a foreign automaker," said York, also a former finance chief at Chrysler.
SMALL DEALS, SPIN OFFS
Deals in the autos sector are still attractive to U.S. based investors, even as credit market turmoil has made raising financing harder. With large leveraged buyouts mostly out of the picture, deal opportunities will likely come from supplier consolidation and the spin-off of noncore assets by larger companies.
Jefferies' Mirro sees a tremendous number of deals in the $100 million to $200 million range. "We've never been busier for looking at financing deals in the automotive industry," he said.
Lazard's Macakanja said a combination of factors were driving the deal making: the need for capacity to be taken out of the sector, suppliers becoming more global, and a broad restructuring and reorganization of the supply base.
Wilbur Ross, the billionaire investor who has been buying companies in the auto interiors sector, said he may look at firms that fall back into bankruptcy as the industry contracts.
Ross, who specializes in buying distressed companies. predicts that some companies that came out of Chapter 11 bankruptcy very highly leveraged could fall back into trouble in 2008 -- "into what we in the industry call Chapter 22, a second time Chapter 11."
"I think the industry is still overpopulated," said Ross.
(For summit blog: http://summitnotebook.reuters.com/)
(Additional reporting by David Bailey in Chicago; Editing by Jeffrey Benkoe)
