DETROIT—As auto suppliers convalesce from 18 months of COVID-19 shutdowns and microchip shortages, more private equity firms are looking to snatch them up. And private equity firms are increasingly willing to pay higher prices if it means getting a crack at participating in the industry's historic shift to electric vehicles and autonomous driving.
In rise from pandemic, auto suppliers see M&A surge
"This is a big year for financial investors in the automotive space," said Dietmar Ostermann, U.S. automotive advisory leader for the international financial advisory firm PwC. "More PE firms are entering the automotive space because they see this interesting technology revolution taking place in electric vehicles and connected cars. And there is a feeling among some of them that they're smarter than the auto industry because automotive isn't used to dealing with big change.
"They want in."
PwC estimates that 2021 will see 174 supplier M&A deals by year-end, up from 101 last year and 159 in pre-pandemic 2019. In its new analysis of global supplier activity, PwC found that 30 percent of this year's deals are going to private equity firms, rather than to fellow auto parts companies.
Also playing a larger role in industry M&A activity today: SPACs, or special-purpose acquisition companies. SPACs are investment vehicles that allow an entity that has no specific business, but has access to the stock market, to acquire a company and instantly make it a publicly traded business with an influx of new capital.
PwC found that 70 percent of this year's 10 largest completed deals and 10 largest pending deals involve a SPAC.
The financial firm estimates there are 600 more SPACs in the market today that could make similar plays. They are not all focused on automotive, Ostermann pointed out. "But if only 10 percent of them are, that's potentially another 60 large deals waiting to happen."
Half of the megadeals in the industry have been for companies in the fields of battery-related technologies, sensors and software, according to PwC. And that new interest is pushing business valuations higher, Ostermann said.
"Last year during COVID, we were seeing valuations decline. But it's clear that we've reached the bottom and now valuations are starting to come back up," he said. "Automotive acquisitions are going to be more expensive going forward. So buying now would be better than buying a year from now."
But the crisis isn't over yet, Ostermann warns.
"It is still the case that 25 percent of the world's largest suppliers show some sign of distress," he said. "They still face a liquidity situation."
PwC tracks about 650 suppliers around the world that are publicly traded and have more than $50 million in sales.
"We believe there are two to six North American suppliers that will not make it, and probably the same number in Europe, with a larger number in Asia," he said. "It's reasonable to assume that the numbers are similar among large private suppliers."
The double whammy of COVID-19 shutdowns and microchip shortages have threatened the health of many auto suppliers around the world since early 2020.
But PwC found that many of them managed to steer through the crisis with the help of government support funds, more-lenient debt arrangements with their lenders, reductions in business overhead and headcount, and surging demand for parts now from automakers.
"The picture is turning around," Ostermann said. "We had a massive performance uptick in the final quarter of 2020. The industry comeback in North America and China—less so Europe—was phenomenal, and a lot of suppliers made up in the back end of the year."
SIGN UP FOR NEWSLETTERS
Rubber News wants to hear from its readers. If you want to express your opinion on a story or issue, email your letter to Editor Bruce Meyer at [email protected].