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Depressed valuations offer opportunities in auto sector

by Lou Whiteman | Published June 26, 2012 at 10:24 AM

The global auto industry is primed for increased dealmaking as recuperated buyers seek to capitalize on still-bearish valuations, according to a new report released by global consulting firm AlixPartners LLP.

The industry, which was near death in North America just a few short years ago, has recovered nicely from its 2009 lows and should benefit from a steady increase in demand, according to Alix managing director John Hoffecker. However, North American auto supplier enterprise value to Ebitda multiples are down 27% in the past year, creating opportunities for value buyers.

Hoffecker attributed the low valuations to short-term issues, most notably a stall in profit growth as suppliers pour money into expansion and development of new technologies ahead of anticipated growth.

Some private equity buyers also remain gun-shy about investing in an industry that was decimated during the recession, he said.

Alix director Christian Cook said he expects suppliers that cleaned up their balance sheets during the downturn to be opportunistic buyers, with a particular emphasis on expanding geographic reach.

Europe, which lags North America in terms of restructuring, could offer the most enticing targets as manufacturers and their suppliers come to grips with falling demand and scale back their operations.

"With Ebitda multiples off more than a quarter and discounted transaction values remaining about flat with the depressed levels of the year before, this may well be a time for companies to be thinking about strategic acquisitions or, just as important, divestitures," Cook said.

Consolidation has slowed among auto manufacturers, with Fiat SpA's post-bankruptcy involvement in Chrysler Group LLC and divestitures including Ford Motor Co.'s 2010 sale of Volvo AB comprising most of the activity. Cook said he expects manufacturers to continue to favor alliances and joint ventures over outright M&A as they seek to share R&D expenses and expand into new regions.

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