Allison Transmission IPO Opens Flat
March 15 2012 - 10:57AM
Dow Jones News
Commercial vehicle transmission maker Allison Transmission
Holdings Inc. (ALSN) didn't get much traction out of its stock on
its first day as a public company Thursday.
The company's shares opened at $23 on the New York Stock
Exchange, flat with its initial public offering price, and were
changing hands recently at $23.03, up less than 1%. A total of 26.1
million shares--4.4 million more than originally planned--were
priced at the midpoint of its expected $22 to $24 range.
Allison Transmission says it is the largest global manufacturer
of fully automatic transmissions for large vehicles, such as
trucks, buses, military and mining equipment. It estimates that it
sold about 62% of the world's automatic transmissions for medium-
and heavy-duty highway commercial vehicles in 2011.
Its transmissions are the standard or exclusive transmission
offered in certain types of vehicles in North America, including
school buses, fire and emergency vehicles, medium- and
heavy-tactical military vehicles, and certain mining trucks. Its
transmissions are also commonly used in various oil and natural gas
drilling and extraction equipment.
The company claims in its prospectus that its brand is one of
the most recognized and respected names in the commercial vehicle
industry.
Allison says its core North American market is poised for
continued recovery. According to ACT Research, after reaching a
20-year low in 2009, the market increased by 54% from 2009 to 2011,
and is expected to show a compound annual growth rate of 9.0% from
2011 to 2014. In addition, the company sees expansion outside of
North America as a growth opportunity; less than 5% of the medium-
and heavy-duty commercial vehicles sold outside North America in
2011 were equipped with fully automatic transmission. Already,
Allison is the leading provider of fully automatic transmissions
for medium- and heavy-duty commercial vehicles in China.
On the cost side, Allison has been cutting expenses. In 2008 it
negotiated a multi-tier wage and benefit structure with its unions
that includes an annual profit-sharing incentive compensation plan
for the hourly workforce tied to the same performance measures used
for the management team and salaried employees. It has also
established new manufacturing facilities in lower-cost labor
manufacturing markets like India and Hungary.
Allison Transmission, which has its headquarters in
Indianapolis, was acquired by The Carlyle Group Inc. and Onex Corp.
in August 2007 for $5.6 billion from General Motors Corp. (GM). The
acquisition was structured as an asset purchase for U.S. federal
income tax purposes, which allows the company to take U.S. federal
income tax deductions of about $315 million annually through 2021
and approximately $183 million in 2022.
All the shares in the offering are being sold by Carlyle and
Onex, so none of the proceeds will benefit the company. Post-IPO,
each of the companies continues to own a 44% stake in the firm.
Net sales rose 12% to $2.16 billion in 2011, compared with 2010.
Allison does carry a lot of debt--nearly $3.4 billion as of Dec.
31--so its interest payments are a drag on its bottom line. But its
operating income in the past two years has been high enough to
overcome the interest costs, allowing the company to turn a profit
of $103 million in 2011 compared to a profit of $30 million in
2010.
The company warns that the commercial vehicle industry has been
more adversely affected by recent economic conditions than many
other industries, because purchases or replacements can be deferred
for many reasons; that particularly hurt the company in 2008 and
2009. Some of the markets in which it operates, including energy,
mining, construction, distribution and motorhome, are also very
cyclical.
Allison's long-term growth strategy depends in part on an
increasing rate of adoption of fully automatic transmissions in
commercial vehicles outside of North America. However, manual
transmissions remain the market leader abroad, and there is no
guarantee that will shift. The large existing installed base of
manual transmissions and customer preferences for manual
transmissions, among other things, could curb growth.
Bank of America Merrill Lynch (BAC), Citigroup Inc. (C), and
JPMorgan Chase & Co. (JPM) managed Allison Transmission's
offering.
--By Lynn Cowan, Dow Jones Newswires; 202-257-2740;
lynn.cowan@dowjones.com
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