M&A outlook for global auto industry weakens, survey says

By Vince Bond Jr.
AUTOMOTIVE NEWS

Published: February 4, 2013 12:44 pm ET
Updated: February 4, 2013 12:47 pm ET

DETROIT -- Due to a lack of confidence in the global business environment, the percentage of automotive companies planning to pursue acquisitions within a year fell to 19 percent, according to an Ernst & Young survey.

That's the lowest point in the Capital Confidence Barometer's two-and-a-half-year history after dropping 20 percentage points from the year before.

Auto companies still expecting to make moves are treading more cautiously, or looking to complete "smaller, less transformative deals" in an uncertain climate, according to the survey, whose results released last month were largely based on responses from supplier executives.

Some of the leading factors behind the uncertainty include "credit markets that aren't particularly strong" in Europe and the U.S. along with the looming fiscal cliff in the U.S when the survey was taken last August and September, said Jim Carter, Americas Automotive Industry Leader for Transaction Advisory Services at Ernst & Young.

"That level of desire to complete an acquisition is lower than I would have expected," Carter said in an interview last month. "There is still tightness in the liquidity in the equity and debt markets in automotive. I think that is likely impacting desire to do M&A."

A panel of more than 1,500 executives, including 188 in the automotive sector, from companies in 41 countries were surveyed last August and September. Approximately 754 of them held CEO, CFO or other C-level positions.

Carter said the automotive results were a "cyclical response" to what was happening at the time, so he expects M&A activity to become more enticing for companies going forward with encouraging signs coming from the Chinese, German and the U.S. markets.

Retail M&A

Not all segments of the auto industry have shown such a bearish outlook on global acquisitions.

Last month, Houston-based retailer Group 1 Automotive Inc. announced plans to acquire one of Brazil's largest auto dealership groups.

The dealerships -- 21 franchises representing eight brands in Sao Paulo and markets in the neighboring state of Parana -- are expected to generate approximately $650 million in estimated annual revenues, Group 1 said.

The purchase price includes approximately $47.4 million in cash, 1.45 million shares of Group 1 common stock priced at $60.77 a share, and the assumption of about $62 million of debt. Analysts said more dealer acquisitions could be expected.

"We are now bullish on the acquisitions outlook, driven by a more stable political and economic environment and supported by recent activity in the industry," Brett Hoselton, a KeyBanc analyst in Cleveland, wrote in a Jan. 22 report.

The strong auto markets in the United States and China may also yield M&A activity in the coming months.

Automakers moved 14.49 million light vehicles in the U.S. in 2012, the most since 2007, and sales of passenger and commercial vehicles in China are expected to rise 8 percent in 2013 to 21 million -- up from 19.4 million last year, according to General Motors.

"We do expect more M&A in the future. I don't think the negative trend that exists currently is necessarily indicative of the future trend," Carter said. "Germany has been performing well; the U.S. market has performed well; China has performed well. If that trend continues, you'll see more companies with broader appetites to do M&A."

Tough global climate

But according to the survey, economic malaise in Europe impacted business for 90 percent of respondents.

With the ongoing Eurozone crisis and slowed growth in emerging markets, more than 60 percent of auto executives expect the global economic downturn to continue for another one or two years.

The report says many companies will focus on bottom line improvements in this environment.

Ernst & Young cited emergency financial maneuvers by the U.S. Federal Reserve and the European Central Bank as key moments that show urgency among policymakers.

"The willingness to do M&A has been impacted. Some companies' growth plans in terms of where they want to invest their capital globally has been impacted by the Eurozone crisis. It certainly has impacted confidence around the sector," Carter said.

But things aren't all bad in Europe.

Germany was considered the top automotive sector investment destination among respondents.

Carter said Germany is a desired market because it's an engineering and technology-focused country that's home to leading OEM's such as Audi, Mercedes-Benz, BMW and Volkswagen.

"That makes it attractive in terms of suppliers wanting to invest in Germany to get access to their customers," Carter said. "Those OEMs that exist in those markets are attractive to our domestic suppliers and other global suppliers."


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M&A outlook for global auto industry weakens, survey says

By Vince Bond Jr.
AUTOMOTIVE NEWS

Published: February 4, 2013 12:44 pm ET
Updated: February 4, 2013 12:47 pm ET

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