American Axle Reaches Deal for Metaldyne--3rd update
November 03 2016 - 2:53PM
Dow Jones News
By John D. Stoll
American Axle & Manufacturing Holdings Inc., a Detroit auto
parts maker spun from General Motors Co. more than two decades ago,
continued its diversification drive with an agreement to purchase
Metaldyne Performance Group Inc. in a $3.3 billion deal that
includes taking on a substantial chunk of debt.
American Axle, which makes several components needed for the
undercarriage or mechanical functions of light or heavy vehicles,
has remained dependent on GM for the bulk of its revenue. Acquiring
Metaldyne, which makes parts for engines and transmissions, gives
the supplier a bigger footprint in Europe and wider array of
customers, American Axle Chief Executive David Dauch said in an
interview Thursday.
The new business will have a combined $7 billion in revenue,
which vaults American Axle closer to the size of some of bigger
U.S.-based auto suppliers such as Visteon Corp. or Cummins Inc.
American Axle agreed to pay $1.6 billion in cash and stock, paying
$21.81 a share to Metaldyne stockholders, a 52% premium to its
Wednesday closing price.
American Axle's diversification comes with risks. The deal
includes assuming $1.7 billion in debt in the heart of a sector
that felled far bigger companies facing heavy financial burdens
when automotive production collapsed. Mr. Dauch has taken a
conservative approach to leverage in recent years and the company
plans to employ that same degree of prudence as it addresses its
additional debt load, he said.
The deal comes amid big profits for U.S. auto suppliers as North
American vehicle production hits record highs and global car makers
continue to invest heavily in technology that improves fuel economy
and safety, such as with autonomous driving features. The sector
was hit hard during the financial crisis, with many suppliers
restructuring under bankruptcy protection, being acquired or going
out of business.
American Axle shares traded down roughly 14% to $14.32, while
Metaldyne traded up more than 40% to $20.15 early Thursday
afternoon. American Axle's heavier debt load could weigh on
investor sentiment as U.S. automotive demand erodes after a
six-year run of growth, said Brian Johnson. a Barlcays PLC analyst,
in a note to investors.
American Axle earlier in 2016 announced new contracts intended
to substantially reduce the percentage of sales coming from GM,
which currently is at 66% of revenue. By including Metaldyne,
reliance on GM would immediately fall to 41% in part because of
additional customers the company has. The combined company's
exposure to GM is forecast to fall to 32% by 2020.
Metaldyne filed for bankruptcy protection in 2009 and the
private-equity owners of the restructured company took it public in
2014. It primarily produces metal parts for engines, transmissions,
brakes and axles. Suppliers like Metaldyne and American Axle are in
a capital-intensive portion of the auto-supply chain, investing
heavily in physical manufacturing assets.
Much of the auto industry's forging capacity was removed from
the North American market at the end of the last decade, and
Metaldyne hasn't faced a barrage of competition because of how much
it costs to open facilities, acquire equipment or navigate the
environmental permitting process.
Automotive deal activity trailed off during the first half of
2016 compared with a record 2015, PricewaterhouseCoopers LLP said
in a recent report on the sector. Last year was disproportionately
affected by ZF Friedrichshafen AG's $12.5 billion purchase of
Michigan-based TRW Automotive Holdings Corp., which married two
large suppliers of safety equipment and other components.
Many auto supply deals have involved larger suppliers, such as
Delphi Automotive PLC or Harman Automotive Industries Inc.,
acquiring smaller companies specializing in software or other
technology needed to connect vehicles to the internet or make them
safer or more fuel efficient.
Write to John D. Stoll at john.stoll@wsj.com
(END) Dow Jones Newswires
November 03, 2016 14:38 ET (18:38 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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