Magna ready to loosen purse strings

Big-ticket acquisitions now an option

Stronach: Was averse to debt

TORONTO -- Magna International Inc., the largest auto supplier in North America, will consider major acquisitions, the company's CEO said.

Acquisitions are gaining momentum among suppliers. For instance, ZF Friedrichshafen AG, a major producer of transmissions, is in talks to acquire TRW Automotive Holdings Corp., which makes steering, safety and electronics systems.

Last week, The Wall Street Journal reported that Lear Corp., a major seat supplier, is completing a deal to buy Eagle Ottawa, a major supplier of auto leather.

Magna, which hasn't made an acquisition of more than $500 million in a decade, is more willing to take on debt to finance significant acquisitions than it was when former chairman Frank Stronach was involved with the company, CEO Don Walker said in an interview in Bloomberg's Toronto offices.

The number of auto suppliers will shrink as car companies push for vendors who can supply fewer global platforms, he said. While Magna would use cash for a small acquisition, it could also take on debt or issue equity if the target was "huge," Walker said.

"We have complete flexibility," he said. "We have good discussions at the board."

The 2008-09 downturn would have been a good time to do deals but the company didn't want to use its cash and with the shares trading so low, a share-backed purchase would have been dilutive.

"We're not in that situation anymore," Walker said.

Stronach, who stepped down as chairman in 2011 as the company switched to a single share-class structure, had shied away from debt in the cyclical auto parts industry. He declined to comment, spokeswoman Michelle Abbott said in an email.

Magna's largest acquisition since 1990 was the $603 million privatization of its public subsidiary Tesma International Inc. of Concord, Ontario, in 2004, according to data compiled by Bloomberg.

The combined value of all of Magna's acquisitions since 1990 in which the terms were disclosed is just $3.3 billion, the data show. What Magna might be interested in acquiring is another question.

The seating business of Johnson Controls Inc. in Milwaukee or a complete takeout of Lear Corp. in suburban Detroit would be the mostly likely targets if Magna was looking to bolster its seating business, Colin Langan, an analyst at UBS Securities said in an interview.

Magna CEO Don Walker says the supplier would consider taking on debt or issuing equity for a “huge” acquisition target.

China growth

Both acquisitions would be worth several billion dollars, Langan said. They would meet Walker's goals though of bolstering businesses Magna is not yet a market leader in and expanding geographically, he added. "They're No. 4 in seating, and acquiring either one would make them No. 1," he said.

Johnson Controls has been putting less emphasis on its automotive business as it moves to a more multi-industrial model, Langan said. Selling the seating business is something they could consider as a result, he said.

Lear, with a $7.9 billion market capitalization, would require an entire takeout because they're not likely to leave themselves as just a wiring harness company, he added. Both assets would achieve another one of Walker's goals though by giving Magna a larger foothold in China, Langan said.

"If you look at both Lear and JCI, they both have pretty good positions in China with their joint ventures," he said. "It would in some ways help them broaden their footprint and give them more on-the-ground experience there."

Magna is the world's third largest supplier, ranked by sales of light-vehicle parts, behind Robert Bosch GmbH and Denso Corp., according to a list compiled by the Automotive News Data Center. Magna's global sales of light-vehicle parts in 2013 were $34.38 billion.

Integration challenges

In the past, Magna has had difficulties integrating some of its larger acquisitions, such as New Venture Gear Inc. in suburban Detroit, which it acquired in 2004 for about $440 million, said David Tyerman, an analyst at Canaccord Genuity Group Inc. in Toronto.

The company is decentralized and relies heavily on plant managers to act as though they're independent businesses, incentivized by the profits of the plant, Tyerman said. Magna ran into issues integrating New Venture, which was a highly unionized work force, into its culture, Tyerman said.

"It does have to be the right deal," he said. "If they went out and simply bought something and it was too expensive, all this hard-earned credibility that they've gotten from a corporate governance standpoint would be thrown out the window," he said.

The U.S. auto market is rebounding from the recession and is headed for its best year since 2006, buoyed by consumer confidence, payroll gains, low interest rates and pent-up demand for new vehicles.

In July, U.S. light-vehicle sales reached an annualized rate, adjusted for seasonal trends, of 16.5 million, according to Autodata Corp. It was the fifth straight month of at least a 16-million pace, the Woodcliff Hills, N.J., researcher said.

“If we did something that really made us a world leader in four or five different product categories we're not today, something in the eyes of the customer that would say, 'Boy, we really want to give them business now because they're so good.'”
Don Walker
Magna International

Sales leader

Magna has rebounded better than its peers. Sales have grown at a compounded annual growth rate of 8 percent the past five years, compared with an average of 3.4 percent for North American auto suppliers, Bloomberg data show.

Profit has been less stellar. Magna's earnings before interest, taxes, depreciation and amortization, measured as a percentage of sales, is 9 percent, compared with a peer average of 10 percent, Bloomberg data show.

Whether an acquisition is transformational wouldn't necessarily be determined by its size, but by what it adds, Walker said.

"If we did something that really made us a world leader in four or five different product categories we're not today, something in the eyes of the customer that would say, 'Boy, we really want to give them business now because they're so good,'" that would be transformational, he said.

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