Private equity firm 3i Group PLC is set to invest USD160 million precision moulded rubber and silicone components maker Q Holding Company and its three operating businesses. The deal is another in a series of moves by private equity companies investing in the automotive industry in recent months.
The most notable example from this year saw Johnson Controls (JCI) sell off part of its interiors business (headliner and sun-visors) to an affiliate of private equity firm Atlas Holdings. Atlas created a new company called Motus Integrated Technologies to handle the business.
Earlier this month, private equity firm Kohlberg Kravis Roberts & Co. (KKR) offered EUR235 million (USD298.1 million) of long-term, flexible financing to Amtek Global Technologies (AGT), according to a press release by KKR. The funds will be used by AGT to replace its existing bridge loan and consolidate all of the company's existing debt.
Other deals include American Securities LLC, a leading private equity firm based in the United States, purchasing of Grede Holdings, a US-based iron castings company that operates 14 foundries and three machining operations in North America. In August, Blackstone paid €440m for automotive parts distributor Alliance Automotive.
Are conditions favourable for PE?
Whether this will lead to increased activity from private equity remains to be seen. Much has changed since the global recession of 2008, which saw automakers and suppliers reaching out for sources of cash as lending tightened. In addition, many private equity firms were burned by their experiences in the automotive supply chain; Ripplewood Holdings listed affiliate RHJ International put USD60 million into Metaldyne Corp., which filed for bankruptcy in 2009 after its portfolio company Asahi Tec acquired it. Goldman Sachs and Cypress Group also sank USD318 million of equity into their 2007 purchase of Cooper-Standard.
Generally, the automotive industry is not very attractive for PE firms due to the cyclical nature of business and the low rate of return. PE-owned suppliers are not popular among automakers as they are less willing to capitulate to increasing pricing pressure by OEMs and will fight vehemently for price rises in components supplied to the customers. They are viewed suspiciously by the unions as there is the perception that most of the time they will implement ruthless restructuring processes, resulting in huge job losses after acquisition.
They also create uncertainty for OEMs, as private equity firms are generally looking for short term gains and are more likely to leave the industry at the very first opportunity.
However, despite these issues, a number of market conditions have emerged that will make automotive suppliers very interesting to private equity; in particular the near-term growth potential seen in production forecasts forecast, coupled with strong growth and return opportunities recorded by suppliers over the last few years.
The last year has seen an increase in the number of mergers and acquisitions happening across the supply chain; most notably the deal involving ZF and TRW. Suppliers at the top of the chain are getting stronger, with more capital available than in the last five years and strengthened negotiating positions with their OEM customers.
The growth at the top of the chain is driving interest further beyond the notable tier one suppliers, where the majority of deals is likely to be done. Private equity firms are generally seen in the industry as looking for short term quick gains rather than looking to invest for the long term. With the responsibility for R&D and new products shifting from OEMs to suppliers and the increasing prevalence of global platforms, a supplier can focus upon a useful technology in a niche area and increase their value dramatically over a short period.
