LEAR WINS UTA WITH $2.3 BILLION CASH BID

Joseph Pryweller PLASTICS NEWS STAFF

Published: March 22, 1999 6:00 am ET

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Topics In Print, Automotive

Lear Corp. has agreed to buy interior parts rival United Technologies Automotive in a startling move that marries North America's second- and third-largest injection molders.

Southfield, Mich.-based Lear signed a definitive purchase agreement March 16 to buy UTA, based in Dearborn, Mich., for $2.3 billion in cash. The acquisition is expected to close by mid-1999, said Leslie Touma, Lear corporate relations director.

The deal will swell Lear's product line to include virtually every part of a car interior. The combination boosts Lear's annual sales to about $12 billion — a gain of almost $3 billion — and adds 90 plants.

Together, the companies recorded more than $1.2 billion in North American injection molding sales during 1997, according to Plastics News rankings. That would have placed Lear slightly behind Troy, Mich.-based Textron Automotive Co. Inc. for the top position.

The purchase ends a heated, back-and-forth battle for UTA that was not settled until March 15, according to several sources. Lear's bid trumped a reported $2.25 billion offer from Blackstone Group, a New York-based automotive holdings company.

UTA's parent company, United Technologies Corp. of Hartford, Conn., announced in late January it had put the wholly owned subsidiary on the sales block.

Ford Motor Co. probably encouraged United Technologies to accept Lear's bid, according to several sources familiar with the negotiations.

Ford — the largest single customer for both companies — would prefer to work with a well-regarded interior supplier such as Lear than with an investment firm that could dismantle the company, said Greg Salchow, equity analyst with Roney Capital Markets in Detroit.

``From the automakers' standpoint, they want the operating company to be the acquiring vehicle,'' Salchow said. ``Selling the division off piecemeal would threaten supply-chain reliability. That possibility could have worried Ford.''

The deal fills in several pieces of the interiors puzzle at Lear on its quest to become an interior-systems integrator. Unlike several competitors, Lear has limited capability to produce injection molded instrument panels and wiring harnesses that can be molded into the interior parts.

UTA, however, is strong in both areas. That was a plum to Lear, said Robert Eller, president of Robert Eller Associates Inc., a plastics consulting firm in Akron, Ohio.

``UTA has a strong, sound base in big programs to mold modular instrument-panel designs,'' Eller said. ``It was very attractive to Lear, and they needed it more than some of their competitors, such as Textron and Magna [Interior Systems].''

Automakers increasingly are relying on interior suppliers to manage entire interior programs, said Craig Fitzgerald, a partner with consulting firm Plante & Moran LLP in Southfield, Mich.

``This puts Lear in position as the first legitimate full-system integrator in the global automotive marketplace,'' he said.

Lear has claimed that when a supplier manages an entire interior system, costs and processing time can be reduced. Lear already is a global leader in the production of seats, door modules and interior trim.

The company also makes plastic headliners through a joint venture with Donnelly Corp. of Holland, Mich. UTA has a larger share of the headliner market than Lear and could help Lear grow that start-up venture, analysts said.

But the marriage, while making good business sense to several analysts, might not offer the same benefit for UTA's plastic-parts suppliers.

Lear is likely to cut its supplier ranks to keep the list to a manageable number, said Jeffrey Mengel, a partner with Plante & Moran who covers the plastics industry.

``How many commodity plastic-part suppliers does a company need?'' Mengel asked. ``The competition among suppliers will be more severe. On the commodity end, it could provide a fair amount of anxiety.''

At the same time, Lear is known as a tough customer both in pricing and in setting payment terms with its suppliers, Mengel said. That could come as a shock to some UTA suppliers, he said.

Some analysts did not expect Lear to land UTA. Lear has a high level of debt, and had announced a major restructuring plan in December.

The restructuring, including 18 plant closings and the eventual layoff of 2,800 people, was done to boost earnings after several previous acquisitions and efficiency problems in Europe. The cutbacks have helped Lear avoid duplication of effort and consolidate some operations, which has enhanced efficiency, Touma said.

As part of the restructuring, as many as 15-20 percent of Lear's sales and technical staff at its Southfield headquarters were laid off in mid-February, according to several sources close to the company.

Still, Lear is known as a company good at generating cash flow and turning around acquisition targets, said analyst Edgar Faler of Olde Discount Corp. in Detroit.

``[The restructuring] might have been a function of digesting so much so fast,'' Faler said. ``But with this acquisition, they've upped the ante on the price of admission for interiors companies.''

Kenneth Way, Lear chairman and chief executive officer, told analysts during a March 17 conference call that the sale would add 5 cents per share to company earnings this year and 35 cents in 2000.

In addition, pending the deal's closure, the company expects to record $400 million in potential new business from UTA, Way told analysts. In addition, by 2003, UTA will have started new contracts worth between $1 billion and $1.5 billion, he said.

Lear has not decided how it will integrate UTA's operations, Touma said. UTA also makes electrical switches and motors, areas that some experts said could be sold by Lear. No plants are expected to be closed, some sources said.

``It's premature to talk about that,'' Touma said. ``UTA has an excellent management team in place, and it's a great opportunity for us to be leaders in the industry.''

In the past, UTA has struggled with sales growth. Company sales dropped by $25 million to $2.96 billion in 1998, due to lower selling prices and the GM strike. In 1996, sales reached $3.23 billion.

Lear's biggest problem could be its larger debt load, said Christina Padgett, vice president and senior analyst with Moody's Investors Service in New York. The credit bureau has placed Lear's debt rating under review for a possible downgrade as a result of the purchase.

The company's debt-to-capital ratio will increase to 70-75 percent, compared with 50 percent today, if the deal is approved, Padgett said. A downgrade could affect the interest rate on a bank loan, she said.

``I don't have specific concerns about UTA, but Lear has a lot on its plate,'' Padgett said. ``It may take awhile to squeeze out efficiencies and have enough cash to reduce debt.''

On March 17, the day the deal was announced, Lear's stock price declined by 37.5 cents to $36 per share in heavy trading. United Technologies' stock rose by 63 cents to $130.25 that day.

But most analysts expected Lear to again work its magic. In four years, Lear has transformed itself from a seating company to become one of the largest worldwide injection molders.

``[The bidding] was very competitive, but we're very pleased to have prevailed,'' Touma said. ``Now, we can go forward, and it gives us capabilities in key areas to make total interiors. It's what our customers want.''


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LEAR WINS UTA WITH $2.3 BILLION CASH BID

Joseph Pryweller PLASTICS NEWS STAFF

Published: March 22, 1999 6:00 am ET

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