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January 29, 2020 02:05 PM

BorgWarner to buy Delphi in all-stock transaction

Alexa St. John
Automotive News
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    Delphi's former headquarters in Troy, Mich.

    BorgWarner Inc. said Jan. 28 it will acquire Delphi Technologies as the two suppliers navigate headwinds in power electronics products and propulsion technologies as the auto industry moves toward electrification.

    The all-stock transaction puts Delphi's value at about $3.3 billion, including debt, according to a news release from Delphi.

    Under the deal, which is expected to close in the second half of the year, Delphi shareholders will receive 0.4534 BorgWarner share for each Delphi share held.

    Upon closing of the transaction, current BorgWarner stockholders are expected to own about 84 percent of the combined company, while current Delphi Technologies stockholders are expected to own about 16 percent.

    Bloomberg first reported on the deal earlier Jan. 28.

    Delphi's operations used to cover a wide swath of plastics processing. In 2008, what was then Delphi Corp. had more than $1 billion in North American injection molding sales alone. It shed much of that business when it spun off its interiors operation into Inteva Products, but it retained processing for its electronics operations, which covered an estimated $76 million in injection molding, according to Plastics News rankings data.

    Delphi then split into Aptiv and Delphi Technologies.

    BorgWarner, a supplier of turbochargers, electric motors and electronic control units, is based in Auburn Hills, Mich. The combined company will be headquartered there.

    Shares of BorgWarner closed down 7.6 percent to close at $35.43 Tuesday on Wall Street. Delphi shares surged 60 percent to close at $15.66.

    "This is a positive for Delphi shareholders to gain scale, lower overhead costs, and speed time to market," Robert W. Baird analyst David Leiker wrote in a research note Jan. 28. "For BorgWarner shareholders, the EV opportunity is meaningfully expanded/accelerated. Incremental exposure to internal combustion engines is in the right places."

    However, Leiker said it is important to ask whether the combined company will act as a "next-gen" automotive supplier or a "legacy" supplier.

    Frederic Lissalde, CEO of BorgWarner, said in a call with investors Jan. 28 that the two suppliers have been discussing the deal since early 2019 and conversations accelerated toward the end of the year.

    Delphi Technologies, a powertrain and aftermarket parts supplier headquartered in London, has been undergoing its own restructuring since its spinoff from Delphi Automotive in 2017. Over the past year especially, the supplier has been shifting away from diesels and expanding in gasoline-powered systems and navigating its own move toward electrification.

    The changes have largely been headed by Rick Dauch since he joined the company as CEO in January 2019.

    Lissalde said the addition of Delphi will strengthen BorgWarner's scale and expertise in electrification.

    "Our strategy is designed to foster growth regardless of how the market evolves," he said.

    Lissalde said the acquisition also enhances BorgWarner's combustion, commercial vehicle and aftermarket businesses.

    "We didn't get to where we are overnight," Lissalde said. "Over the last several years, BorgWarner has been on a journey to transition to advanced propulsion and electrification. ... We knew we needed increased electronics capability and scale, and today we're doing just that."

    "Technology was the driver for this transaction," he added.

    Calum MacRae, director of automotive product development at GlobalData, said in a statement that the move will help the two companies wrestle with the new challenges presented by connected, autonomous, shared and electric vehicle megatrends.

    However, "this is just a short-term fix for the long-term issues that these businesses face," MacRae said. "No doubt there will be other mergers of a similar ilk that will ratchet down costs but not lead to sustainable long-term competitive advantage."

    As part of Tuesday's announcement, BorgWarner also said its board of directors authorized a share repurchase program of up to $1 billion. This reflects BorgWarner's "belief in the strong free cash flow of the combined company," Lissalde said.

    Dauch told investors that the combined company is an opportunity to become more efficient amid Delphi's own cost-reduction efforts, including the supplier's goal to reduce annual costs by a total of $200 million through the end of 2022.

    Dauch said the deal is "expected to create a pioneering propulsion technologies leader" and that he expects the combined company to be "unmatched in the industry."

    As for Dauch's role in the combined company, Lissalde told investors, "we'll keep you posted." Lissalde will continue as CEO, and Kevin Nowlan, BorgWarner's CFO, will also remain in his position.

    The companies were not clear about any job cuts to come as a result of the acquisition.

    BorgWarner ranks No. 22 on the Automotive News list of the top 100 global suppliers, with worldwide sales to automakers of $10.53 billion in 2018, while Delphi ranks No. 62, with global sales to automakers of an estimated $3.86 billion in the same period.

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