BorgWarner, Delphi proceed with acquisition at lower price

DETROIT -- BorgWarner Inc. and Delphi Technologies plc resolved a dispute that threatened to end the companies' previously announced merger, shaving about $500 million in value off the price.

Delphi Technologies announced on March 30 it would draw down all of its available credit, about $500 million, to build a war chest to stabilize its balance sheet during the COVID-19 crisis.

A day later, BorgWarner sent a letter to Delphi's board alleging it breached the terms of its deal to sell the company to BorgWarner and it has 30 days to resolve the issue.

Under a new agreement, announced Wednesday, BorgWarner consents to Delphi's draw down of its available credit, as long as it doesn't draw down more than $250 million before the deal's closing in the second half of the year. The deal also revises the amount of BorgWarner common shares Delphi stockholders will receive in the acquisition to 0.4307 shares of BorgWarner for each Delphi share, or about $1 billion worth of stock, down from 0.4534 shares valued at closer to $1.5 billion.

The merged company will be owned 85 percent by BorgWarner shareholders and 15 percent by Delphi shareholders, Delphi said in a press release.

Both companies' engine and transmission businesses are seen by analysts as entering a period of decline as carmakers consolidate and invest in the development of electric cars. They've been investing in products automakers will need for hybrid models that use both gasoline engines and battery power, as well as fully electric vehicles.

"This could be the beginning of powertrain consolidation, which is coming out of necessity," Chris McNally, an analyst with Evercore ISI, told Crain's when the deal was announced in January. "All the suppliers are dealing with lower global volumes combined with the transition towards electric vehicles, which requires heavy investment."

Delphi also reported its earnings Wednesday, heavily marred by declining global vehicle demand in the wake of COVID-19.

The supplier reported a net loss of $54 million for the first quarter of 2020, which ended on March 31, on revenue of $945 million. During Q1 of 2019, Delphi reported net income of $19 million on revenue of $1.2 billion.

Delphi attributed much of the 18 percent decline in revenue during the quarter to production slowdowns and customer plant shutdowns due to COVID-19. Despite China being the epicenter of the virus for most of the quarter, Delphi increased sales in the country by 12 percent. Instead, Q1 sales decreased by 22 percent in North America, 20 percent in Europe and 15 percent in South America.

"During the COVID-19 pandemic, our focus has and continues to be on the safety of our people, customers and suppliers and on adhering to government directives, while taking the necessary actions to navigate the significant shorter-term impacts to our industry," CEO Richard Dauch said in a press release. "Our restructuring initiatives and footprint consolidation plans are ahead of schedule, allowing us to accelerate our cost savings and preserve cash."

BorgWarner also reported a sales drop in the first quarter and lowered its full-year guidance because of the impact of COVID-19, the supplier said Wednesday.

Both suppliers are based in suburban Detroit.