ZF's pursuit of TRW may spark wave of mergers in supply chain

Autoliv, Visteon may be targets, analysts say

NEW YORK -- The biggest auto-parts deal since 2007 may be just the start of consolidation, with Autoliv Inc. and Visteon Corp. among the next potential targets.

ZF Friedrichshafen AG is exploring a takeover proposal for TRW Automotive Holdings Corp. that could value the car-safety technology provider at as much as $13 billion, people familiar with the matter have said.

More auto-parts companies may combine as overcapacity constrains their ability to add scale on their own, according to UBS AG.

"I've been surprised over the last three years that we haven't seen more M&A," said Colin Langan, a New York-based auto analyst at UBS. "This will probably put a lot of pressure on other suppliers to think of other deals. There's definitely strategic rationale."

Autoliv, a $9.6 billion maker of airbags, shares the same allure as TRW, with consumer demand and government regulation fueling greater adoption of safety features, according to Teneo Holdings.

Visteon could attract suitors with a strong foothold in climate systems and vehicle electronics, UBS said. The $4.7 billion auto-parts company trades at a discount to the industry's median sales multiple, as does Tenneco Inc., a $4.2 billion emissions-control supplier that Gabelli & Co. said may lure Cummins Inc.

TRW outlook

ZF confirmed July 10 that it's in talks with TRW about a possible offer, after a Bloomberg News report of the company's takeover interest.

The German auto supplier is exploring a bid that would value TRW at $110 to $112.50 a share, people with knowledge of the matter later said.

Should the companies agree to a takeover, it would be the biggest deal in the industry since Continental AG bought VDO Automotive AG from Siemens AG in the midst of the financial crisis seven years ago, according to data compiled by Bloomberg.

Other suitors, such as Magna International Inc. and Continental, could still enter the bidding for TRW, said Richard Hilgert of Morningstar Inc.

A private-equity buyer can't be ruled out either, he said.

Buyout firm Blackstone Group LP acquired TRW from Northrop Grumman Corp. in 2003. ZF is a highly motivated buyer, though, and may be tough to beat, Brian Johnson, an analyst at Barclays Plc, wrote in a July 17 report.

Representatives for TRW, Magna and Continental declined to comment. A representative for ZF referred to its statement earlier this month.

The leftovers

Even without a bidding war for TRW, industry dealmaking isn't going to disappear.

As automakers such as Ford Motor Co. try to cut development costs by reducing their roster of suppliers, scale becomes increasingly important.

And improved profitability and cash flow at car-parts companies means "the pieces are there for M&A," Brian Sponheimer, a Rye, New York-based analyst at Gabelli, whose parent company Gamco Investors Inc. oversees about $49 billion.

Visteon, which was spun off from Ford in 2000, is still undervalued even after a 47 percent gain in the last year, according to Sponheimer, who said it could be a target.

The company, based in Van Buren Township, Mich., makes heating and air conditioning systems and automotive electronics, such as smartphone integration tools.

"That's a name that has a very underappreciated business in terms of the quality of the assets they hold," Langan of UBS said. "They're small enough that it could fit into a larger supplier's footprint."

Since taking over as CEO in 2012, Tim Leuliette has remade Visteon, focusing on Asia and its higher-margin, higher-growth businesses.

In the last three years, the company sold its lighting business, exited complex Chinese joint ventures and agreed to buy Johnson Controls Inc.'s electronics business.

Safety matters

Tenneco is another company that buyers would be able to get for a relative bargain. The maker of diesel-exhaust filters and mufflers trades at about 0.5 times its revenue in the last year, lower than the median peer multiple, according to data compiled by Bloomberg.

Cummins, a $28 billion supplier of truck engines based in Columbus, Ind., could be interested, said Sponheimer, whose parent company owns Tenneco shares.

Demand for car-safety products is rising, adding another reason for dealmaking. TRW estimates the market for driver-assistance technology will increase more than fivefold through 2020.

Autoliv offers potential suitors an entry into that market, said Sanjeev Varma, a managing director at Teneo Capital, the investment bank arm of Teneo Holdings. "If anyone is using the same investment thesis used on TRW, they would look at Autoliv," he said.

Bite size

Smaller consolidation candidates include Cooper-Standard Holdings Inc. and Tower International Inc., which have market values of $1.1 billion and $739 million, respectively, said Hilgert of Morningstar.

Suppliers of lesser size will have to evaluate whether they're big enough on their own to support large automakers, said Dietmar Ostermann, the head of PricewaterhouseCoopers LLP's global auto advisory practice.

"It's becoming almost impossible for smaller suppliers that are not completely global," he said. A deal for TRW "will have a very significant sobering effect on some of the smaller suppliers."

Representatives for Visteon and Autoliv, as well as Lake Forest, Illinois-based Tenneco declined to comment. So did representatives for Cooper-Standard, based in Novi, Mich., and Livonia, Michigan-based Tower International.

A representative for Cummins didn't respond to requests for comment.

Rising stock prices may dissuade some buyers from pouncing.

The Bloomberg World Auto Parts & Equipment Index has climbed 74 percent in the last two years, almost twice the gain for the Standard & Poor's 500 Index.

Even so, ZF's discussions with TRW signal that "buyers and sellers are coming closer to reaching agreements on price," said Langan of UBS.

"It's a sign that other transactions that maybe have been slow to come about maybe will move forward," he said.

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