BorgWarner's Acquisition of Delphi Technologies
By: Xie Shi Jie David, Alex Gordon, Martin Ratchev
Overview of the deal
M&A activity within the Industrials has been dormant for the past few months, with the pandemic having reduced the viability of many mergers. Despite this, American automotive components giant BorgWarner has managed to complete an all-stock acquisition of competitor Delphi Technologies.
BorgWarner and Delphi Technologies both operate within the automotive industry, primarily providing components to a large customer base of automakers across the globe, including Ford and Volkswagen. The acquisition of Delphi Technologies will enable Borg Warner to maintain its market-leading position in electric propulsion as markets begin the transition away from fossil-fuelled vehicles.
This $3.3 bn acquisition, completed in October 2020, is expected to generate significant cost savings, and help BorgWarner to increase its market share. Delphi Technologies stockholders would receive a fixed exchange ratio of 0.4534 shares of BorgWarner common stock per Delphi Technologies share. As of completion, BorgWarner holds 84% of Delphi’s shares, while the remaining 16% has remained in the hands of previous shareholders.
Company Details: BorgWarner Inc.
Founded in 1987, BorgWarner Inc. is an automotive components maker providing global solutions for combustion, hybrid, and electric vehicles. With a global presence of 67 locations in 19 countries, the company provides these components to original equipment manufacturers of light vehicles, commercial vehicles, and off-highway vehicles.
Founded in 1987, headquartered in Auburn Hills, Michigan
CEO: Frederic Lissalde
Number of employees: 29,000
Market capitalisation: $9.47 Billion
EV: $10.08 Billion
LTM Revenue: $8.80 Billion
LTM EBITDA: $1.34 Billion
LTM EV/Revenue: 1.15x
LTM EV/EBITDA: 7.52x
Company Details: Delphi Technologies
Delphi Automotive specialises in providing combustion systems, electrification products, software and controls. It has a presence in car and commercial vehicle markets as well as also specialising in vehicle repairs. In 2017, Delphi Automotive was renamed Aptiv as well as creating a new company, Delphi Technologies, which specialises exclusively in the powertrain (main components that generate and deliver power) and aftermarket business.
Founded in 2014, headquartered in London, United Kingdom
CEO: Tonit Calaway
Number of employees: 19,000
Market capitalisation: $1.47 Billion
EV: $3.14 Billion
LTM Revenue: $3.66 Billion
LTM EBITDA: $297 Million
LTM EV/Revenue: 0.82x
LTM EV/EBITDA: 5.2x
Strategic Rationale and Short-term consequences
Fuelled by the pandemic, companies are placing more emphasis on ESG, particularly cleaner and more efficient technologies. With the acquisition of Delphi Technologies, BorgWarner hopes to reinforce its leadership in electrified propulsion systems. The combined company will offer a more comprehensive portfolio of propulsion products, which increases BorgWarner’s content per vehicle.
With tougher emission standards, especially in Europe, many automakers have announced increased investments in electric and hybrid vehicles. In 2019, Automakers in Europe invested a record €60 Billion in Electric cars and batteries, 19x more than in 2018. Particularly, Volkswagen, the largest carmaker in the world and one of BorgWarner’s biggest customers, is investing $34 Billion over the next 5 years to make electric or hybrid versions of every vehicle in its lineup. The acquisition thus places BorgWarner in a position to take advantage of future propulsion migration away from gas-fuelled engines to electric powertrains.
Upon the completion of the acquisition on 1 Oct 2020, share price rose as much as 2.5% before closing 1% higher than the open. For 2020, net sales is expected to be lower than that of 2019 due to headwinds caused by the pandemic. Operating income and Free Cash Flow for 2020 is also impacted by ($15) Million and ($100) Million respectively due to the transaction related costs of the acquisition. Pro-forma, BorgWarner expects a decrease in operating margin from 12% to 11% due to a planned increase in R&D spending for the next few years.
With the acquisition, BorgWarner acquired industry-leading power electronics, software, calibration capabilities, and scale. Some key technologies attained include On Board Chargers and Battery Pack Controllers. Delphi Technologies’ expertise and established production and supply chain complement BorgWarner’s innovative and green portfolio.
Pro-forma, this will give BorgWarner more balance across its light vehicles, commercial vehicles, and aftermarket businesses. By 2025, BorgWarner believes that the technological integration will increase content per vehicle by 2x for Hybrid Vehicles and by 2.6x for electric Vehicles. By 2023, cost reduction is expected to be $175 Million per year, up from the $125 Million guidance previously. BorgWarner also hopes to add $0.31 in earnings per share starting 2022. In addition, the combined company also expects 36% of its revenue to come from hybrid and electrical vehicle parts.
A Biden presidency can also be a tailwind for BorgWarner to achieve long term growth. Biden’s climate and environmental justice proposal aims to invest $1.7 trillion over the next ten years, including the acceleration of electric/hybrid vehicle technologies. Further to this, the UK government’s commitment to supporting an agenda to stop the sale of diesel and petrol cars by 2030 as well as the growing investment from UK firms to overhaul their vehicle fleets with EVs represents the growing market that Borg Warner will be able to supply.
Risk and uncertainties
As with any transaction, there are significant short and long term risks associated with this acquisition. Since it’s spin-off from General Motors (GM) in 2009, Delphi’s pension plan has been plagued by mismanagement; there have been several disputes with GM over which party is obligated to cover these liabilities. Former employees are still engaged in Legal action in an attempt to overturn a ruling which gave the US government control of the pension plan. This risk shouldn’t affect the success of the merger unless the action escalates, as it currently only concerns former employees.
A second risk was also the biggest obstacle for the successful completion of the deal. Delphi Technologies used some of its $500 million credit facility to help with recovery from the pandemic. The firms agreed that this was acceptable so long as borrowing did not exceed $225 million. This Debt, as well as debt used to finance the transaction is now the responsibility of BorgWarner.
The merger has brought together two market leaders, who hope to expand on their current lead. The primary factor affecting the long term outlook for this acquisition is how quickly the automotive industry is able to recover from the long term impacts of the pandemic. Demand for the light vehicles, which is BorgWarner’s primary market for components, is recovering at a slower rate than expected. Sales of cars fell by 13 million in 2020, although 2021 sales are expected to increase by 7 million units, meaning that there is still time to go before the industry has completely recovered.
In light of the UK government's planned announcement that they will be imposing a ban on petrol and diesel powered cars after 2030, any automotive company wishing to have a long-term future will need to have the infrastructure, products and expertise to be in a position to supply the growing demand for electric vehicles. Further to this, independent estimates indicate that UK companies are forecasted to spend upwards of £12 billion over the next two years overhauling their fleet of vehicles with electric alternatives. This acquisition strengthens Borg Warner’s powertrain expertise and resources, which places them in a strong position to take advantage of the growing demand for EVs.