11 Feb Automotive Industry Update – Q4 2018
From a global perspective, the volume of M&A transactions within the automotive sector remained robust in 2018, setting a high water mark and marginally outpacing the activity level of approximately 900 reported transactions in 2017. As is often the case when there are technology shifts fundamentally re-shaping an industry, much the way the dynamics of powertrain electrification and autonomous vehicles, among others, are changing the landscape for auto makers and their suppliers, there are often very large, transformative transactions amongst industry leaders in search of either gaining or maintaining access to the latest generation of advanced technology. The overall value of automotive transactions in 2018 was indicative of that dynamic, with the aggregate announced deal value reaching just under $100 billion and roughly doubling the prior year’s total. There were seven megadeals (deals valued at greater than $4 billion) during the year that comprised over half of the aggregate deal value, the largest of which was the announced $13.2 billion divestiture of Johnson Control’s (JCI) power solutions unit to private equity investor Brookfield Business Partners. The JCI power solutions business is the global leader in the manufacture and distribution of lead-acid batteries for nearly all types of vehicles, including hybrid and electrical models. The $13.2 billion valuation for this deal implies a multiple of 7.9 times trailing twelve-month EBITDA.
While there were a significant number of transactions focused on the pursuit of advanced technologies in 2018, including the JCI deal previously noted and the acquisition by Lacks Enterprises highlighted in this document, the majority of automotive supplier transactions last year focused on more traditional strategic rationale such as industry consolidation, product line extension, and diversification related to both platforms and customers. Tenneco’s $5.4 billion acquisition of Federal-Mogul during the year provides a prime example of transaction in which scale and diversification were primary drivers.
In spite of the substantial number of deals, there were a number of factors during the past year that created an increasing level of disruption and uncertainty to the M&A environment in the automotive sector as the year progressed. Concerns over supply chain risks, rising commodity prices, mounting geopolitical tension, broader imposition of tariffs, rising interest rates and slowing economic growth planted seeds of doubt among investors otherwise encouraged by solid economic fundaments, strong sales results, and ample, relatively low-cost capital. Illustrative of this rising level of uncertainty, the supplier barometer index, which is published by OESA (Original Equipment Suppliers Association) and based on a survey of North American automotive suppliers’ 12-month outlook, dropped during 2018 from a level of 57 in Q1 to 39 in Q4, where a level of 50 represents a neutral reading.
Despite these escalating headwinds, the industry seems poised for another strong year of M&A in 2019. Strong balance sheets and significant levels of liquidity among both strategic and financial investors, combined with the availability and attractive cost of debt financing, will provide the fuel for transaction aspirations that fulfill solid strategic objectives. As the automotive sector continues to experience rapid evolution related in large part to automated, connected, electric and sharing (ACES) technologies, M&A strategies will continue to provide an effective mechanism for companies to address these dynamic trends. In addition, despite significant consolidation in recent years, the automotive supply base remains highly fragmented. As suppliers struggle to maintain and enhance profit margins while striving to meet the escalating demands of OEM customers, M&A alternatives involving synergistic business combinations that deliver economies of scale and risk mitigation through diversification will be highly prized. Absent any significant and unexpected negative economic or geopolitical events, we believe 2019 will continue the recent trend of significant M&A activity for the automotive sector.
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