DETROIT - The Automotive Supplier $10 Billion Club has a new member.
Lear Corp. and United Technologies Automotive - two companies that helped build the market for complete automotive interiors - last week agreed to do it together.
Lear's planned $2.3 billion purchase will combine the world's sixth-largest supplier with No. 31 UT Automotive. With pro forma 1998 sales of $12.1 billion, the combination would make Lear the sixth supplier to rank above the $10 billion mark.
That group had just four members last year. But in January, TRW Inc. snapped up LucasVarity PLC to create the fifth-largest parts group.
The UT Automotive deal is the largest of the 14 that Lear has pulled off in the past four years. CEO Ken Way snatched UT Automotive away from at least three New York financial buyers and propelled Lear toward a new round of global growth.
'The company strengthened its last remaining weakness in North America,' said analyst Richard Hilgert of Fahnstock & Co. Inc. in Detroit. He said Lear stands to gain more business because of its expanded ability to provide a complete automotive interior.
With the purchase, expected to be completed May 1, Lear adds UT Automotive's strength in instrument panels, headliners, and electrical and electronic systems, analysts say. That complements Lear's strength in seating, door panels, and floor and acoustic systems.
The combination fits the demands of automakers, who want suppliers capable of providing a complete interior as a unit.
Now Lear will be able to provide that with a single design team - and match the capabilities of its archrival, Johnson Controls Inc.
Lear, based in Southfield, Mich., also stands to gain considerable cost savings. Lear told analysts last week that $50 million in expected savings this year and $110 million in 2000 will help defray the purchase price.
The cost savings are expected as Lear cuts duplication in purchasing, research and development and factories. Lear executives declined to be specific and did not indicate plans for UT Automotive's Dearborn, Mich., headquarters, now being expanded.
LEAR SAW POTENTIAL
Lear saw the untapped potential at UT Automotive, which has struggled to shift from being a parts maker to an interior systems supplier. It needed investment dollars, but parent United Technologies Corp., a conglomerate based in Hartford, Conn., realized greater profit margins from its other businesses.
Its automotive arm generated net profit of just six percent on sales of $3 billion last year. Lear had 1998 sales of $9.1 billion.
UT Automotive President C. Scott Greer began its turnaround two years ago.
He broke down the walls separating his electrical, electronics and automotive interior groups, creating the product mix that allowed him to win the cockpit business for General Motors' Delta small cars.
It was that potential that attracted the financial buyers, who largely have stayed on the sidelines of the consolidation among the largest parts makers. Those bidders included the Blackstone Group, Kohlberg Kravis Roberts & Co. and Kelso & Co.
Lear's big gain is UT Automotive's instrument panel business, which has 10 percent of the North American market. Its interior business generates sales of $600 million annually but has suffered losses because of the twin UAW strikes last year against GM.
Analyst Hilgert said UT Automotive's wire harness and electronics business will give Lear the ability to add far greater electronics content and new business opportunities. Fully 75 percent of UT Automotive's business comes from electrical and electronics.
UT Automotive's electric motors business is profitable and provides strong cash flow. But Lear told analysts it is a candidate for divestiture, and there are several potential buyers.
BIG GROWTH BRINGS RISKS
A sale would help pay down the debt Lear will incur from its all-cash bid for the company. Lear's debt-to-capital ratio will balloon to 70 percent. Analysts were told the balance-sheet stretch for UT Automotive will keep Lear from making another billion-dollar deal anytime soon.
That growth is not without risk for Lear. Lear must convince its customers that despite its acquisitions of so many companies and corporate cultures, it can be a seamless interior systems integrator, said Craig Cather, CEO of CSM Worldwide, a Northville, Mich., forecasting firm.
Citing the integration challenges Lear faces with this acquisition as well as its 1998 acquisition of Delphi Automotive Systems Corp.'s seating business, Moody's Investors Service put the company's debt ratings under review for possible downgrade.