TI Group plc has tendered $570 million to buy automotive parts supplier Walbro Corp., piecing together a new company that can provide a complete fuel system from the gas nozzle to the engine.
Walbro, based in Auburn Hills, Mich., is one of the world's largest producers of plastic fuel tanks, plus other parts for fuel storage and delivery.
But the publicly traded company, founded 49 years ago, has hit harder times the past several years after going on a heady buying spree.
After spending $350 million from 1994-97 to build and acquire 10 new plants, Walbro found itself strapped with too much debt and too little income. The firm lost $36 million in its 1997 fiscal year.
The proposed sale to TI Group should help counter that.
``We didn't want to go into an economic downturn as highly leveraged as we currently were,'' said Walbro Chief Financial Officer Michael Shope. ``The merger creates an opportunity to move forward with our global systems strategy and with a partner who supports that strategy.''
Abingdon, England-based TI Group offered Walbro shareholders $20 for each of the company's 8.7 million shares outstanding. After assuming Walbro's $388 million debt and adding other convertible securities, the total offer is valued at $570 million.
The firm's 1,100 shareholders have until May 26 to tender their shares, Shope said. If fewer than 90 percent of shareholders agree to that, a stockholder vote will be necessary. Early indications show that shareholders are willing to go along with the purchase plan, Shope said. Shareholders include some of Walbro's 5,422 employees.
Walbro discreetly started listening to offers for the firm six months ago, after hiring investment firm Salomon Smith Barney to evaluate means to maximize shareholder value, Shope said.
Among those interested were several fuel-tank competitors, Shope said. According to sources, those firms included Kautex Textron, a division of Troy, Mich.-based Textron Automotive Co., and Troy-based Solvay Automotive.
Solvay and Textron officials did not confirm an interest in Walbro.
The deal also is subject to board approval from both Walbro and TI Group. Officials expect the deal to be complete by early July, said James Katzoff, executive vice president of TI Group Inc., a TI holding company in New York.
Walbro's stock price jumped from $12.31 a share on April 27 to $19.56 a share at the close of business April 28, when the tender offer was announced. More than 3.8 million shares were traded that day.
The sale to TI could give Walbro an edge over its competition. TI also owns Bundy Group, a supplier of fluid-handling systems based in Warren, Mich.
TI plans to mesh the automotive operations of Walbro and Bundy under the banner of TI Automotive Systems. Bundy is one of the world's largest producers of fuel and vapor lines, both from extruded plastic and roll-formed steel. The firm also makes nylon quick connectors.
Merging the operations of Bundy and Walbro will give TI the capability to make a complete fuel system, Katzoff said.
Besides making fuel tanks from high density polyethylene, Walbro also produces fuel pumps, sensors and fuel-sending units.
``It's a logical extension of TI Group's strategy,'' Katzoff said. ``We can combine the businesses and come up with a unique global leadership role. The products are completely complementary.''
Bundy already commands about 25 percent of the fuel and vapor line market worldwide, said James Davis, president of Bundy Group of North America. The company recorded about $1.3 billion in 1998 sales, he said.
``The trend by OEMs has been to buy systems and modules,'' he said. ``We saw this as a way to complete our fuel-system portfolio.''
Walbro holds about 10 percent of the $6.5 billion global market for fuel storage and delivery systems, Katzoff said. Walbro recorded $677.9 million in 1998 sales.
With the combined company, TI Automotive Systems expects to record about $2 billion in sales this year, Katzoff added. Details still need to be determined concerning operations, he said.
``TI's next step is to increase the size of that market,'' said equity analyst Nick Hyslop, who covers TI Group for London-based Dresdner Kleinwort Benson. ``There's no reason why they can't be successful at it.''
Chief Executive Officer David Westgate at Solvay Automotive, one of the largest fuel-tank providers in North America, said the merger would have minimal impact on the industry. The companies might not be able to make cost-saving fuel modules from the differing parts.
``It doesn't really take into account parts consolidation for fuel systems,'' Westgate said. ``They don't have the latitude to bundle components together with the types of parts they produce.''
Westgate also questioned whether Walbro's reliance on Bundy would limit its ability to negotiate a good price for fuel and vapor tubing. But, he added, the sale offered good value for shareholders.
Given Walbro's circumstances, the deal was a fair one, said analyst Gregg Lucas of Wachovia Securities Inc. in Charlotte, N.C.
``They'll be in a better position to weather a downturn,'' Lucas said. ``And they can fold in significant capital spending from a much larger parent.''
TI, a conglomerate that owns firms making elastomeric seals and aerospace systems, recorded sales of $3.5 billion last year.
But analyst Richard Hilgert of Detroit-based Fahnestock & Co. said Walbro might have weathered that downturn on its own. Currently, about 40 percent of fuel tanks made in North America are produced in plastic, according to Walbro figures.
But by 2002, that figure is expected to shoot as high as 80 percent. Walbro has new fuel-tank contracts worth between $80 million and $100 million for each of the next three years, Shope said.
The company's profit has taken a turn for the better, from a loss in 1997 to $5.1 million in profit during 1998.
``They were on the edge of getting the cash flow needed to straighten out their balance sheet,'' Hilgert said.
As part of the sale, Walbro President and Chief Executive Officer Frank Bauchiero has agreed to head TI Automotive Systems for at least three years, Shope said. Other Walbro executives will continue with the new company for at least one year, he added.
Walbro also makes fuel systems for small industrial engines. That business, less than a quarter of total Walbro sales, will continue separately, Katzoff said.
Walbro ranked 51st on Plastics News' list of blow molders, with $30.6 million in North American sales. The company has 28 locations in 15 countries.