Auto parts consolidation
Last week, Japanese auto parts company Asahi Tec announced it would acquire US auto parts maker Metaldyne. Metaldyne is a specialist in engine parts manufacture. The deal is for $1.2 billion, including debt, which is significant
The auto parts business in the US is in free-fall. There have been 12major auto supplier bankruptcies since 2001 -- five of them in the last year, according to a Detroit Free Press article ("Metaldyne has a rescuer", 9/2/06). And Metaldyne was certainly in line to be one of the next to go.
Among the bankrupt, the most notorious is Delphi, spun off in 1999 from General Motors and the #1 US firm. Other big ones include Collins & Aikman Corp, Dana, Tower Automotive Meridian Automotive Systems, EaglePicher Inc, Uni Boring (now Diversified Machine), and Trim Trends. Visteon Corp., #2 in the US, spun off from Ford in 2000, is not bankrupt, but was radically restructured this year with bankruptcy looming. Many other industry businesses are similarly precarious.
The downturn is caused by a mix of factors: the accelerating decline of US automakers, competition from abroad, high union wages, lack of investment capital for modernizing, and the raise in prices for steel and oil.
There are several factors of interest in this buyout. One is that Asahi Tec is owned by Belgium-based RHJ International, which in turn is owned by US equity firm Ripplewood. RHJ/Ripplewood also owns parts companies Niles, Inc., and Honsel International. Metaldyne is also owned by equity firm Heartland Industrial Partners.
Many other equity companies have bought recently into auto parts. One of the best known is International Auto Components Group (IAC), run by steel and coal entrepreneur Wilbur Ross.. That group has recently snatched up all or part of Collins & Aikman Europe, Oxford Automotive Inc., and Safety Components International Inc. Given Ross's pattern, more is doubtless on the way.
Other major recent equity ownership situations include the Carlyle Group (AxleTech International and a position in Diversified Machine) and Tennenbaum Capital Partners (Eagle Picher).
Carlyle group AxleTech International and a position in Diversified Machine.
Another Financial Times article ("Automotive parts", 9/1/06) notes that the move to equity firms is natural:
Private equity funds are a logical temporary home. Parts makers are classic turnaround assets. They need the cash that financial sponsors can bring, and the global reach that buys - preferably through acquisition, since building plants can be an expensive and ruinous affair. Carmakers are becoming increasingly globalised, and expect their suppliers to follow suit.
That hits on the issue of the growing global nature of the auto parts industry. Over a third of cars sold in the US now are from Asian companies, and expectations are that will soon reach half. Metaldyne's American clients are losing market share. In 2000, as an article in the Financial Times ("Asahi Tec to buy Metaldyne" 9/2/2006) points out, Metaldyne had no dealings with Asian auto companies in 2000, and has moved that up to 8%, but perceives the need to get up to 30-40%. The article quotes the Metaldyne CEO as saying "For a supplier to say he has a long-term strategy for growth and not have a presence in Asia is a risk,."
A BusinessWeek article ("(A Run On Detroit's Parts Makers", 10/10/05) foretells the rapid consolidation of the market in the near future:
The upshot: In a few years, many of today's 10,000 parts makers may be gone. Those that survive will collectively have fewer plants -- and should be running a lot closer to full tilt. More production will move overseas. Eventually, say analysts and investors, the industry will start making serious money. "Half of the supplier names will not be around in five years," says Craig Fitzgerald, a partner at management consulting firm Plante & Moran. "The remaining companies will be bigger, better capitalized, and healthier.
