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ZF-TRW combination could spark more supplier deals

FRANKFURT/BERLIN (Reuters) -- German supplier ZF Friedrichshafen's takeover offer for rival TRW Automotive Holdings Corp. looks unlikely to draw rival bids for the U.S. company, but could trigger further deals down the line, bankers and analysts said today.

Privately held ZF, a powertrain and chassis specialist, said on Thursday that it was in early talks to buy TRW in a deal that would create one of the world's biggest component makers with combined revenue of $40 billion, including about $36.5 billion in direct annual business with automakers.

The deal would expand ZF's mechanics-heavy portfolio to include airbags, collision sensors and other electronics with possible applications in self-driving cars -- an area where investment is booming to reflect potentially high returns.

In a statement confirming the "preliminary, non-binding" approach, TRW said on Thursday that its board was also evaluating "other strategic alternatives which may enhance stockholder value."

TRW shares rose 8 percent on Thursday and gained another 2.6 percent today to close at a record $101.47.

Both companies have declined to comment further and neither disclosed financial details of the tentative bid for TRW, which has a market capitalization of about $11 billion.

However, the size of the deal makes counter-bids by groups such as Continental, Delphi or Magna unlikely, several automotive investment bankers said.

"It's just too big, and for those who could shoulder it, it's too pricey," said one banker, adding that rival suppliers may focus instead on potential acquisitions among businesses that could be sold by the merging companies.

Antitrust concerns may force the sale of steering systems assets, a source close to one of the companies said.

Rival suppliers Magna, Continental, Delphi and Autoliv declined to comment or did not return calls and messages left with their press officials.

Poor fit

Continental would see TRW as a poor fit for its business, said a person with knowledge of the company's thinking.

Some analysts, meanwhile, believe that a ZF-TRW deal would focus the thinking of rivals anxious not to be left behind in a sector becoming increasingly fixated by autonomous driving technology and able to take advantage of an abundance of potential buyout cash thanks to low interest rates.

"Suppliers that depend on the combustion engine need to look for new business opportunities, and autonomous driving implies great future potential," said Bjoern Voss of M.M. Warburg. "A shake-up of the industry is possible."

Increasing safety requirements and demand for driver-assistance systems such as adaptive cruise control are already boosting electronics as a share of vehicle content.

The driver-assistance market is set to expand almost six-fold by the end of the decade, according to the Center of Automotive Management, a German industry think-tank.

Besides technology giant Google, carmakers at the forefront of self-driving car development include existing ZF clients BMW and Mercedes-Benz.

"It's a sound strategic move by ZF," Frankfurt-based Commerzbank analyst Sascha Gommel said. "They're positioning themselves in a lucrative future market."

Banking talks

Banks have entered talks with ZF about supplying loans for its acquisition, a person familiar with the matter said.

"ZF should be able to secure loans of up to 10 billion euros," said another automotive banker not directly involved.

TRW, which counts General Motors, VW and almost all other major auto makers among its clients, has increased sales by half since 2009 to $17.4 billion last year.

Combining with ZF's 16.8 billion euros ($23 billion) in revenue would create a pairing to rival Japan's Denso Corp , the world's second-biggest supplier with $35.8 billion in 2013 auto-parts sales, according to the Automotive News data center.

"It's too soon to know if this deal will come to fruition, but the two companies have complementary product lines," IHS Automotive Analysts Tim Urquhart and Stephanie Brinley said in a note on Friday.

"Given the drive towards electric assistance for driving systems and self-driving cars, the combination of expertise could make for a powerful automotive supplier."

ZF ranks No. 9 on the Automotive News list of the top 100 global suppliers with worldwide sales to automakers of $20.4 billion during its 2013 fiscal year. TRW ranks No. 11 on that list with worldwide sales to automakers of $16.1 billion in 2013.  

Automotive News contributed to this report.

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