Dana, GKN Driveline Division to combine in $5 billion deal

MAUMEE, Ohio—Dana Inc. has reached a definitive agreement to combine with the Driveline Division of GKN P.L.C., allowing it to re-incorporate in the United Kingdom as Dana P.L.C.

The deal consists of about $5 billion in cash and stock being transferred to GKN and its shareholders. Dana will pay $1.6 billion in cash to GKN and issue 133 million new Dana P.L.C. shares to GKN's shareholders, valued at about $3.5 billion based on Dana's share price as of March 8. The new company will assume about $1 billion of net pension liabilities.

The combined company will have sales of $13.4 billion, based on their respective 2017 results. The deal is subject to customary closing conditions and regulatory approvals. Dana projects it to close in the second half of 2018.

"I'm not sure that I've personally witnessed a more complementary transaction," James Kamsickas, Dana president and CEO, said on a March 9 call discussing the deal. "If you want to look at it from a product, market, geography or a company culture standpoint, the list goes on that's for sure."

Company structure

Based in Redditch, England, GKN brings about $7 billion in 2017 sales, 61 manufacturing locations in 23 countries, five research and development centers, and 35,000 employees to the Dana portfolio. Kamsickas and Chief Financial Officer Jonathan Collins will remain in their roles as leaders of the combined company, of which Dana shareholders will own about 52.75 percent.

Keith Wandell, currently non-executive chairman of Dana, will remain in the same role as well. The board will expand to include two representatives designated by GKN.

Collins said on a March 9 conference call to investors that the move to re-incorporate to the U.K. will bring about $600 million in tax benefits. The merger also is projected to create about $1.2 billion in net synergies. And despite being based in the U.K., the new company will remain listed on the New York Stock Exchange.

"It was pretty obvious that this would always make sense from a Dana perspective, but timing is everything," Kamsickas said. "We've been building up to this as a company in terms of building infrastructure through inorganic activities and changing our operating model. Different things happened in the U.K., but we stayed on our path and fortunately it worked out. This is a great day for us."

Expanded global footprint

Dana said the combined company will be the global leader in vehicle drive systems across all three major mobility markets—light vehicle, commercial vehicle and off-highway. It also will have a core e-drive technology portfolio, positioning it to capitalize on electrification opportunities as the automotive market continues to rapidly evolve.

The transaction is expected to result in $235 million of annual cost synergies within the first three years, accretive to earnings in the first full year, which would be 2019 if the deal closes as projected.

About $120 million will come from procurement through purchasing scale benefits, aligned commercial terms and strategic supply partnerships. Operating efficiencies through an integrated global footprint and lean manufacturing will account for nearly $70 million, while selling, general and administrative expenses will account for the remaining $45 million.

GKN Driveline also operates one of the largest driveline businesses in China via Shanghai GKN Huayu Driveline Systems (SDS), a joint venture with SAIC Motor—who Collins said is the No. 1 domestic light vehicle original equipment manufacturer in China. In 2017, the business generated consolidated sales of about $6.2 billion.

Collins said that Dana also brings a substantial JV to the table—Dongfeng Dana Axle Co. Ltd., which is a partnership with Dongfeng Commercial Vehicle Co. Ltd. Collins said Dongfeng is the largest domestic commercial vehicle OEM in China.

"Together we have an opportunity through these JVs with longstanding, well-respected partners, to continue to lead in the largest, fastest growing market in the world for our products," Collins said.

Strong product mix

GKN has built market leadership positions in three light-vehicle product segments— constant-velocity jointed driveshafts, all-wheel-drive systems and electrified driveline solutions. According to Dana, the business has expertise across mechanical systems, electronic and software control, and particularly vehicle integration. The transaction also includes GKN's off-highway powertrain services business, focusing on off-highway power delivery and service.

About 59 percent of Dana's sales come from its sport-utility vehicle/truck business, 21 percent from off-highway and 20 percent in commercial vehicle. GKN is overwhelmingly based in the light vehicle segment/crossover utility vehicle segment, accounting for 92 percent of its sales. The remaining 8 percent comes from the off-highway segment.

The new company will account for 45 percent of its sales from the light vehicle/CUV segment, 30 percent in SUV/truck, 15 percent off-highway and 10 percent commercial vehicle. It will serve all of the major global OEMs. Ford, Fiat Chrysler Automobiles, Renault/Nissan, General Motors, Volkswagen, Toyota and Tata combine to account for 55 percent of sales, with Ford leading the way at 16 percent. All other OEMs—including Volvo, Deere, Paccar, BMW and Daimler—account for the remainder.

Collins said there are a few overlaps in product offerings, namely on the all-wheel drive systems side, but added that was the only area he could point to where the companies have direct competition.

"We have a strong conviction that doubling the size and scale of the business, diversifying the portfolio and really beginning to capitalize on the best electrification platform out there should make the shares in the new company well-positioned to achieve a more premium valuation in the market," Collins said. "That is the true long-term upside in the combination."