PHILADELPHIA -- Automotive parts supplier ArvinMeritor Inc. on Thursday said it plans to sell two businesses that account for about $1 billion in annual sales in order to sharpen its focus on core auto-making customers.
The Troy, Mich.-based company, whose shares were up 7 percent, plans to sell a metal coil-coating business and its larger replacement car parts business, which makes exhaust systems, filters and other products.
The auto parts sector has been a hotbed for acquisitions this year, and some Wall Street analysts and bankers had expected ArvinMeritor's decision for months.
Rival and former takeover target Dana Corp. agreed to sell its replacement parts unit in July after a heated auction that reaped $1.1 billion. Industry experts have since suggested that ArvinMeritor might follow suit to capitalize on strength in demand from private equity buyers for such assets.
ArvinMeritor said it will take a noncash goodwill impairment charge of $190 million, or $2.77 a share, in the fiscal fourth quarter related to the aftermarket unit.
"We consider this a clear positive, with new management beginning to show its cards," UBS analyst Rob Hinchliffe said in a research note. "We believe smaller equals stronger, and a more focused company will help to close the valuation gap relative to its peers."
ArvinMeritor said it plans to use the proceeds of the sales to strengthen the balance sheet and selectively reinvest in its core business segments. It expects to complete the divestitures during the 2005 fiscal year.
"Selling the aftermarket business may not be as easy as it would have been a year ago (before metals costs became an industry problem), but we still think there is enough private equity money that would be interested in this asset," J.P. Morgan analyst Himanshu Patel said in a research note.
New York-based Cypress Group has made two big purchases in the sector this year. Along with Dana's replacement parts business, it has agreed to buy Cooper Tire and Rubber Co.'s Cooper-Standard Automotive for $1.17 billion in partnership with Goldman Sachs Capital Partners.
Last year, Blackstone Group bought TRW Inc.'s auto parts business for $4.7 billion. Carlyle Group, which has expressed interest in several industry auctions this year, bought United Components last year for $800 million.
ArvinMeritor said it is time for its replacement parts business to "move forward under new owners whose strategic priorities include building critical mass in the business." It hired Lehman Brothers to run that auction.
The aftermarket car parts operation had more than $800 million of sales in fiscal 2003, while the coil coating business had sales of $200 million. The combined operations accounted for about one-eighth of ArvinMeritor's nearly $8 billion in 2003 sales.
ArvinMeritor Chairman Charles McClure, who joined the company in August, said the divestitures will let the company exploit its core competencies in the global automotive and commercial truck markets.
The company will record both businesses as discontinued operations when it reports fourth-quarter earnings on Nov. 15. The coil coating business is a wholly owned subsidiary.