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Visteon considers asset swaps

Struggling economy puts the skids on cash transactions

Shopping Visteon
Visteon Corp. has identified four businesses open to sale or partnership. Here's a list, with approximate 2000 revenue:

  • Steering, $1.2 billion

  • Glass, $750 million

  • Seating, $600 million

  • Restraint electronics, $200 million

  • Visteon Corp. is negotiating a trade of some of its assets to another supplier, a tactic more parts makers are considering as the economy falters.

    Visteon is in discussions about swapping businesses, Chairman Peter Pestillo said in an interview at the Frankfurt auto show in September.

    Pestillo wouldn't give any details about bargaining partners or businesses being dealt, but the Ford Motor Co. spinoff previously has identified four businesses slated for sale or partnership: steering, seating, glass and restraint electronics, which together brought in about $2.7 billion last year.

    Some of those units have been on the block since January. But depressed stock prices, high debt loads and lenders' reluctance to extend credit have limited deal making. Those factors were exacerbated by the Sept. 11 terrorist attacks, which further slowed merger and acquisition activity, say industry observers.

    So asset swaps may make more sense for some parts makers in the midst of portfolio realignments.

    "It lets you do noncash transactions or limited cash transactions, and it is a way of arraying strengths and weaknesses that's better than buying from one and selling to another," Pestillo said. "So you develop mutual dependencies, and sometimes that makes deals easier: My sick business for yours."

    But such deals are complex. It's hard to agree on values for an operation's assets and contracts, and those determinations rarely line up dollar for dollar with a trading partner's own offerings.

    Cash, stock, future contract guarantees or other considerations could be required to sweeten a swap for one of the parties. With parts makers such as Visteon and Delphi Automotive Systems Corp., their higher cost UAW labor agreements throw up another barrier to interested parties, observers said.

    "When you're talking about an asset-for-asset swap, it gets very creative, and there's almost infinite possibilities you could evaluate," said Matthew Stover, Salomon Smith Barney analyst. "But they're rarely simple, and they're rarely clean."

    One way out

    But they may be one of the most likely ways to execute a deal at a time when cash reserves of suppliers have dwindled, stock prices are depressed, debt loads are high and buyers are scarce. A swap eliminates the need to pay a cash premium for buying an asset or to sell a business at a substantial discount.

    "You're seeing more cooperation today," said Jeff Sands, managing director of the automotive investment banking practice at Raymond James & Associates Inc.

    "The overall M&A market has been so depressed over the last year."

    Visteon has learned that firsthand. A deal for its troubled glass business fell through in late 2000. The company identified steering and seating as additional businesses open to sale in January 2001, and despite discussions, no blockbuster sale is imminent, Pestillo said. The company has had offers for the restraint electronics business.

    Delphi is one possible partner for the steering business. The world's largest supplier - a steering sales and technology leader - has pursued a possible deal for Visteon's $1.2 billion steering unit, one investment banker said.

    Other major steering players include TRW Inc., ZF Lenksysteme GmbH, GKN PLC and Koyo Seiko Co.

    For Delphi, acquiring Visteon's Ford-heavy steering business would diversify its customer base and give it a larger foothold with the world's No. 2 automaker. Delphi did win a high-volume steering contract with Ford last summer, but making major inroads with new customers will take time. With 67 percent of Delphi's business tied to GM, customer and geographical diversification will primarily drive any portfolio additions, company executives say.

    Delphi also is trying to resolve the fate of $3 billion to $4 billion of businesses in its own portfolio by year end. The climate makes deals difficult to execute, said Delphi CEO J.T. Battenberg III, but progress is under way.

    "We'll get it done," Battenberg said. "Again, there are three levers to pull: Fix, close or sell. And there may be some other innovative solutions."

    Complicated tasks

    Delphi CFO Alan Dawes said asset swaps won't be ruled out, though they are complicated transactions that aren't the company's first choice.

    "If it were a very solid entity, it might be a possibility," Dawes said. "But it does make it a more complicated transaction."

    Swaps aren't unheard of, though. Dana Corp. has made a couple of such deals in recent years. It acquired Eaton Corp.'s heavy axle and brake business in 1998 and sold its clutch business to Eaton. Cash was involved, but the two remain connected with a marketing agreement.

    In 1999, Dana traded its constant velocity joint business for GKN PLC's global cardan-jointed propeller shaft business.

    The two parties also formed a strategic alliance to develop advanced driveline systems and modular assemblies.

    Though innovative, those deals weren't pure asset trades where each went their own way upon completion.

    "At the end of the day, they're now joined at the hip," Stover said.

    But it's a way for companies to define the future of a less-than-ideal business and move forward. And that is an increasingly attractive option.

    Said Sands: "Even before Sept. 11, we already had a significant downturn in the market. I think all corporations were looking to find ways to conserve cash and not spend money on acquisitions.

    "They'll look at joint ventures, strategic alliances and swapping assets to fund future growth and create new opportunities."

    You can reach Amy Wilson at awilson@crain.com

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