Plastech Engineered Products Inc. is in final talks to buy competitor LDM Technologies Inc. in a move that likely will take it to the $1 billion mark in annual sales.
It is a big leap for Plastech, a company that posted only about a third of that sales level five years ago. The company has grown aggressively by pursuing new business through special sourcing contracts with customers, new locations and now a major acquisition.
Industry watchers, though, are waiting to see what moves Plastech will take next.
``What I haven't been able to figure out is the end game for Plastech,'' said Jeff Mengel, a partner with Plante & Moran LLP consulting group in Auburn Hills, Mich. ``What's their end game in terms of a strategic standpoint?''
LDM, based in Auburn Hills, Mich., and Dearborn, Mich.-based Plastech confirmed Dec. 18 that they had entered an agreement for the acquisition. The companies have not disclosed any purchase price, but said they expect the deal to be completed in February.
Both companies are privately held and their executives had little public comment. Each produces interior, exterior and under-the-hood components for the auto industry with extensive injection molding in-house. Plastech also operates some blow molding facilities.
Plastech, founded by Julie Nguyen Brown - who was born in Vietnam - spent millions of dollars in 2001 to become a strategic supplier to interior integrator Johnson Controls Inc., providing not only parts, but also serving as a coordinator for other suppliers.
That agreement already significantly boosted the firm, which has grown from an estimated $300 million in sales in 1997 to more than $550 million in 2002, although competitors are waiting to see final fallout from the contract. Analysts noted competitors want to find out if the company will ``cherry pick'' the best business out of future JCI contracts, leaving few premium opportunities for other firms.
Buying LDM - with $425 million in sales for its last fiscal year - should make Plastech one of the biggest minority-owned automotive suppliers in North America.
But size alone will not guarantee continued growth, Mengel noted, although engineering expertise within LDM should add more capabilities within Plastech. Adding more in-house capabilities could worry integrators who now use Plastech as a Tier 2 supplier, though.
``The mega Tier 2 strategy has not worked all that well for others,'' Mengel said. ``So what is the position they want to have in the food chain of the auto industry?''
LDM put itself on the auction block in early 2003 even as it successfully negotiated a fiscal turnaround that saw it go from a net loss of $9.4 million on sales of $390 million in 2001 to a net profit of $7.8 million on sales of $425 million in its 2003 fiscal year, which ended Sept. 28.
The company had invested heavily in a new factory in Romulus, Mich., to supply bumpers, only to see the start of production delayed by a year by its automotive customer.
Once the vehicle launched in 2002, the firm could begin recouping its investment costs. The plant posted $89.8 million in sales for 2003.
LDM's engineering expertise has led to proprietary programs, including an injection molded energy absorber for both bumper systems and interior components. It also is producing complete bumper systems, something that will be new for Plastech, Mengel said.
LDM has $138 million in long-term debt. Plastech has no public debt, but did receive a cash infusion of $30 million in 2001 from publicly-traded financial group American Capital Strategies Ltd. as it ramped up major expansion plans.
American Capital officials declined comment on the acquisition plan.
Credit analysts with Standard & Poor's called the proposal positive.
``Although the terms of the transaction have not been disclosed ... the combined entity could have a stronger financial profile should the merger be completed as planned,'' analyst Linli Chee said.
Plastech has more than 14 factories with 2,500 employees and in 2003 announced plans for new plants in Monroe, Mich., and Birmingham, Ala. LDM has nearly 3,200 workers and 16 factories. Those combined holdings, along with Plastech's added marketing tool as a minority-owned supplier, may prompt other small and midsize molders into mergers and acquisitions, said Mike Benson, a director in the investment banking practice of Farmington Hills, Mich.-based Stout Risius Ross Inc.
``Now they're competing against a minority supplier of that size, with those economies of scale, and that's going to be difficult,'' he said. ``You have to look at consolidation.''
Both companies have different cultures, but the benefits are huge if the two can merge smoothly, an analyst said.
``They're a couple of prominent Ford [Motor Co.] suppliers, very competitive and technically competent,'' said David Eberly, senior managing director and founder of Beringea LLC, a private equity and investment banking firm based in Farmington Hills, Mich ``If they can get the two organizational chemistries right, it'll be a hell of a business.''
Kosdrosky is a staff reporter for Crain's Detroit Business.