Westport - Evaluating a Buyout and possible Buyers

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Westport Innovations (WPRT) is a technology focused company on natural gas transportation. Natural gas users are getting increased attention because of the shale gas revolution in the US which has reduced natural gas prices to historic lows. One of the major natural gas advantages is that it is considered less polluting than coal and other fossil fuels. The Companies which make products using natural gas fuels such as GE are natural beneficiaries of low natural gas prices. WPRT possesses the world’s biggest patent portfolio on NG engine technology and has forged relationships with many of the world’s top engine and auto companies. We think WPRT is one of the better ways to play the NG transportation theme given that the company is technology play (CLN is more of an infra play). The company’s stock price had fallen ~40% from its peak price to $26 in December, 2012. Since then the stock has gone up by almost ~20% on speculation that the company is a possible buyout target. WPRT forms a good buyout target and in this article I will expand more on this reasoning by giving a list of possible buyers and their interest in buying WPRT.

1)      Existing Partners

Westport has partnerships with the who’s who of the automobile industry. As per the company’s website

Westport currently has strategic alliances with three of the world’s top four engine producers, and supplies or has strategic alliances with six of the world’s top ten truck producers. In the light-duty market, Westport and Westport LD supply or have strategic relationships with seven of the world’s top ten automotive OEMs.

a) The company has got strong manufacturing partnerships with leading vehicle engine companies like Cummins (CMI) and Weichai. It makes sense for these companies who understand WPRT value to make a bid for the company. These are the most probable acquirers of WPRT in my view. Caterpillar (CAT) is another partner which can look to acquire WPRT. The company is trying to accelerate growth and recently bought a Chinese company. The other partners such as vehicle OEMs don’t benefit as much from acquiring NG engine technology.

b) Auto OEMs – Automobile OEMs can also bid for the company as it would give them a boost over others in getting ahead in NG vehicles. The company has partnerships with the following auto companies:

i) Ford (F) – Westport has achieved a decent amount of success in its partnership with Ford and is set to introduce of natural gas powered versions of the Ford F-450 and F-550 Super Duty trucks in 2013.

ii) General Motors (GM) – Company has signed a couple of agreements with GM to collaborate on developing advanced gas engines for Light Duty Trucks

iii) Tata Motors (TTM) – Westport signed an agreement with Indian vehicle manufacturer Tata Motors in Oct, 2012 to develop NG engines for buses and trucks. TTM is India’s largest producer of commercial vehicles.

iv) Volvo AB – Westport has a long standing agreement to supply Westport natural gas engine technology to this Swedish transport maker of buses, trucks and engines.

The company has agreements with other automobile companies such as Hyundai, BMW, and Isuzu etc. All of these companies are possible acquirers of WPRT.

2)      Non-Partner Companies

Westport is a good acquisition target for other engine companies like Navistar as well which currently do not have partnerships with Westport. While Westport is not profit making, it is still going at a fast clip in the slowing automobile industry. WPRT will grow its revenues at 30% in 2012, despite the industry facing problems due to general economic slowdown in developed countries and slow pace in building of NG infrastructure in USA.

Buyout Challenges

A potential acquirer of Westport Innovation will face issues on how to proceed with the agreements that Westport has made with other auto companies and engine makers. I think that the engine companies will have a smaller problem dealing with other Westport partners compared to vehicle OEMs.

Westport Valuation

Westport is not a cheap stock based on conventional metrics with a P/B and P/S of 4.4 and 7.9 respectively. However, with a current market capitalization of $1.7 billion, WPRT remains an easy buyout target for the above mentioned companies. These companies can easily get finance to buy a target in this range.

Summary

I think that Westport Innovations (WPRT) is one of the best ways to play the increasing adoption of Natural Gas as fuel in the transportation industry. Electric vehicles and hybrid cars are too still immature to replace fossil fuel transport. The recent brouhaha with the hyped EV maker Tesla’s (TSLA) range illustrates the point that these vehicles will still take a long time to enter the mainstream. Natural gas has a 40% advantage over gasoline cars and the only thing stopping their adoption is the lack on fuel infrastructure. Clean Energy Fuels (CLNE) and major users of NG vehicles like Waste Management (WM) are already putting up the infrastructure. I think that WPRT is a good buy regardless whether a buyout happens or not.

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