Mando Corporation’s announcement that it reached an agreement with National Pension Services (NPS) to secure rights to buy the latter’s 8.1% stake in Halla Climate Control (HCC) is a setback for US supplier Visteon, which intended to gain complete ownership of HCC. Visteon already owns 70% stake in HCC. The announcement is interesting considering it came in less than two weeks after NPS rejected Visteon’s tender offer after reviewing HCC’s future value and growth potential.
The rejection by the South Korean pension fund meant that Visteon would not be able to get the necessary 95% stake in HCC, a pre-condition the US supplier had initially set to accept tendered shares. According to Korean rules, 95% ownership would have allowed Visteon to delist HCC and merge the latter’s business with its own climate control system business. The consolidation would have made Visteon the second leading supplier of climate control systems after Denso. Visteon’s failure to reach that threshold limit forced the US supplier to terminate the USD800m tender offer.
It was widely expected for quite some time that Visteon would come with a tender offer to gain full control of HCC. Last year the US supplier conducted a strategic review of its business following which it decided to focus on only two of its four businesses—climate and electronics—and divest the remaining two low-margin businesses of lighting and interior systems. Visteon has already divested its lighting business to India’s Varroc Group this year. The company also entered into a non-binding agreement with Huayu Automotive Systems in late 2011 to sell most of its interior business to their Chinese joint-venture Yanfeng Visteon Automotive Trims Limited. However, last month Visteon cancelled the deal after the two companies failed to reach a final agreement. Visteon also blamed unfavourable business conditions in Europe, from where the business unit generates a major chunk of revenue, for its failure to reach final agreement.
Last week’s resignation of CEO Don Stebbings after four years at the helm, has increased speculation that a breakup of the auto parts supplier could be near. Tim Leuliette will take over as interim CEO. Visteon has been exploring the sale of noncore assets for a while as a way to streamline its corporate structure and boost profit margins. It has been facing breakup pressure from board members and shareholders, who believe the company is worth more in parts than as a whole. Stebbins' resignation clears the way for this strategy to be put into action.
The failed bid for Halla was a major setback for those who wished to see the company remain a single entity. Their argument is that breaking up Visteon would not work because its businesses are closely intertwined and that selling either Yanfeng or Halla would be difficult. With Stebbings gone, Visteon may now look to either sell its holdings in Halla to Mando or be acquired wholly by Mando.
There was speculation from day one that Visteon’s offer would not find many buyers. The US supplier’s offer price of KRW28,500 (USD25.05) per share, for 32 million outstanding shares, was 14% more than HCC’s closing price on 4 July 2012, a day before tender offer was announced. This might have seemed an attractive offer for Visteon but not for investors, including NPS, which believed that HCC commands a better premium, thanks to its strong growth prospects. Analysts believe that other factors could have also forced NPS to turn down Visteon’s offer. For example, HCC’s union in Korea was not in favour of a US supplier gaining full ownership of a Korean company. The union threatened to go on a strike if Visteon’s offer was accepted. Rumor has it that HCC’s main customer Hyundai-Kia, which contributes 60% to its sales, was also not in favour of Visteon gaining full control of HCC. A complete ownership by Visteon would have increased the Korean automaker’s dependence on a foreign supplier.
