Delphi could be an oracle for automotive IPOs

Dustin Walsh covers auto suppliers for Crain's Detroit Business, an affiliate of Automotive News.

You've read the headlines. Greece is playing politics while the nation teeters on default, the U.S. can't get a grip on its own financial future and automotive hangs in the balance. Auto stock performance charts look like a mountain range, peaks to valleys and back.

So reports surfacing last week that Troy-based Delphi Automotive was pushing forward this month with an initial public offering came as a surprise.

But should it?

The IPO market resumed activity in mid-October after two months of zero IPOs, according to Kathleen Shelton Smith, principal at Greenwich, Conn.-based IPO investment advisory firm Renaissance Capital LLC.

Since the beginning of the third quarter, Renaissance's IPO index is up 14.5 percent, while the S&P 500 is up 11.5 percent over the same period.

"Confidence," Smith said, "is returning to the market."

David Sowerby, portfolio manager for Loomis, Sayles & Co. LP in Bloomfield Hills, Mich., said despite the macro economic environment, investors can't argue against company performance coming out of the auto industry.

"On a macro basis, the IPO market is going to continue to have this insecure headwind out of the situation in Europe, the U.S. debt issue and generally slow business growth environment," he said. "But investors have seen very good news come out of corporate performance with better cash flow, earnings and top-line revenue growth."

Delphi is no exception. The former General Motors Co. unit has shown steady performance since climbing out of Chapter 11 bankruptcy in Oct. 2009.

Its revenue has hovered near $4 billion since the middle of 2010 and net income has been near $300 million for the last three quarters.

Cash flow has been steadily increasing over the past three quarters as well, reaching $410 million in the third quarter, ending Sept. 30.

Delphi's EBITDA has also remained steady (above $500 million for three consecutive quarters) assuring investors the company is serious about its fiscal responsibility.

However, Delphi's hedge fund owners are reportedly downgrading the IPO from $1 billion to $550 million.

Richard Hilgert, automotive equity analyst for Chicago-based Morningstar Inc., said investors want out, but it's not unprecedented for them to retain a portion of stock to make the deal — citing private equity firm Blackstone's continued stake in TRW Automotive and American Axle after their IPOs.

"A smaller deal would enable the equity holders to get at least some return in the near term and retain control of the company while management establishes a following on the Street," he said in an email. "As global economic conditions improve and industry volumes rise, the shares should appreciate with an already established Street following. Later, the equity holders could then sell their shares to the public in increments at improved valuations."

If Delphi does move forward with the IPO and it gets positive investor reception, we could see others pushing forward with IPOs.

IPOs totaling $8.9 billion were canceled or postponed in the third quarter, and $34 billion worth of new offerings have been scrapped in the first nine months of the year, Bloomberg reported.

Wilbur Ross' supplier IAC Group, with its North American and Asian headquarters in Southfield, has delayed its IPO until next year, according to reports in November.

Kevin Marsh, partner at Birmingham-based investment advisory firm Angle Advisors, said a successful Delphi IPO could push others off the fence.

"It's definitely a good sign for automotive markets," he said. "A strong showing from Delphi would help support others to be successful as well and break the ice dam between auto and investors."

IAC declined to comment on this story. But, you can bet your underwater mortgage that Wilbur Ross and supplier directors around the globe will be watching Delphi's IPO closely, looking for a glimmer of optimism.

ATTENTION COMMENTERS: Automotive News has monitored a significant increase in the number of personal attacks and abusive comments on our site. We encourage our readers to voice their opinions and argue their points. We expect disagreement. We do not expect our readers to turn on each other. We will be aggressively deleting all comments that personally attack another poster, or an article author, even if the comment is otherwise a well-argued observation. If we see repeated behavior, we will ban the commenter. Please help us maintain a civil level of discourse.

Email Newsletters
  • General newsletters
  • (Weekdays)
  • (Mondays)
  • (As needed)
  • Video newscasts
  • (Weekdays)
  • (Weekdays)
  • (Saturdays)
  • Special interest newsletters
  • (Thursdays)
  • (Tuesdays)
  • (Monthly)
  • (Monthly)
  • (Wednesdays)
  • (Bimonthly)
  • Special reports
  • (As needed)
  • (As needed)
  • Communication preferences
  • You can unsubscribe at any time through links in these emails. For more information, see our Privacy Policy.