Auto suppliers BorgWarner Inc. and Delphi Technologies plc are in a quarrel over finances amid the global coronavirus outbreak that has halted auto production — a spat that could end their $1.5 billion merger deal.
Delphi Technologies on Monday drew down all of its available credit, about $500 million, to build a war chest to stabilize its balance sheet during the crisis. BorgWarner, however, told Delphi that the move breached terms of the deal to sell the company to BorgWarner and it has 30 days to resolve the issue.
BorgWarner said it received a response letter from Delphi disputing its breach assertion, claiming BorgWarner unreasonably withheld its consent to the revolver draw.
"Both companies continue to believe in the long-term strategic value of the transaction and are still working together towards closing the transaction in the second half of 2020," the suppliers said in emailed statements.
Delphi said in a filing with the U.S. Securities and Exchange Commission: "There can be no assurance, however, that BorgWarner and the company will reach a mutually acceptable resolution or that the transaction will close."
David Leiker, senior research analyst for Robert W. Baird & Co. Inc., said BorgWarner may be positioning to lower its initial bid.
"We speculate this is a move from BorgWarner to renegotiate the agreement ..." he said in an analyst note.
The companies announced terms of a deal in January for BorgWarner to acquire Delphi Technologies, a move intended to unite two auto suppliers facing substantial financial pressure from the predicted shift to electric vehicles.
Both companies' engine and transmission businesses are seen by analysts as entering a period of decline, but are hoping a coupling will create enough volume to sustain.
Experts say this is the start of a long and possibly painful consolidation throughout the industry. That will come at a time when some are predicting sales of internal-combustion engines — and perhaps autos overall — may have peaked.
In 2019, automakers sold a total of 329,528 electric vehicles, nearly half of them Tesla Model 3s, according to data compiled by InsideEVs. That's a tiny fraction of the more than 17 million vehicles sold last year in North America.
But automakers are being forced by governments around the world to improve fuel efficiency and cut emissions and are turning to smaller, lighter engines and electrifying their lineups. The industry had been hit by sluggish economic growth and the U.S. trade war with China.
Now the coronavirus pandemic has upended that trajectory, at least in the short-term.
TrueCar is forecasting a U.S. car sales drop for March of 37 percent and further predicts April could dip between 50 percent to 60 percent from a year ago. In U.S. states under "stay-at-home" orders, like Michigan, sales fell as much as 80 percent to 90 percent, Cox Automotive estimated.
Many suppliers, including Aptiv, American Axle & Manufacturing and Meritor, announced drawdowns of available credit last week, following in General Motors' and Ford's footsteps, to shore up cash during the crisis.