US: Global automotive industry M&A activity declines 44% - PwC
Global automotive industry merger and acquisition (M&A) activity slowed during the first half (H1) of 2012, according to PwC. In H1 2012, 264 deals closed with a disclosed value of US$10.6bn, reflecting a sizeable decline compared to H1 2011, which totalled 303 completed deals with a disclosed valued at $18.8bn.
"Europe is taking a toll on global M&A deal activity," said Paul Elie, US automotive transaction services leader, PwC. "Historically, Europe has been among the most active regions in automotive M&A. That said, automotive companies from emerging countries like China and India have opportunities to acquire technology or market access at favourable valuations in Europe."
The current crisis and ensuing austerity measures significantly impacted the automotive industry, with new car registrations declining by 6.3% through H1 of the year. PwC's Autofacts expects 2012 annual sales for Europe to decline by 7.3% to 12.6 million units, nearly 3.4 million units below the 2007 peak.
Given the current manufacturing footprint in Europe, the region is now straddled with nearly 5.8 million units of excess light vehicle manufacturing capacity. These challenges diminished the appetite and resources among European strategic buyers.
These challenges have also heightened the risks around European assets and exposure to the region. The current operating environment in Europe may translate into favourable valuations and an increase in inbound M&A activity geared towards acquiring technology and/or market access over the next 12 to 18 months.
Unlike Europe, North America underwent restructuring during the 2008 - 2009 recession, and is now attracting more investments. North American operations are also churning out significant profits, providing strategic buyers with the financial resources to execute M&A strategies. As a result, North American acquirers' share of global M&A increased from 20% in 2010 to 26% in the H1 of 2012. North American entities were also the most prominent cross-border acquirers, with 16 out of 46 cross border deals.
Asia was the most active region with more than a third of the global automotive M&A activity during the H1 of 2012. However, most activity was intra-regional, with 86 out of 98 transactions between Asian entities. With the domestic sales slowdown in both China and India, buyers from these markets may look for opportunities to augment domestic sales. These buyers are also likely to pursue technology deals to compete globally, as well as to defend against foreign competition.
Component suppliers showing resilience
While deal activity slowed across all categories, component suppliers were the most resilient, registering only a 5% decline in deal volume compared to 19% and 21% declines in vehicle manufacturers and other categories respectively. A recent PwC supplier consolidation study predicts sustained component supplier M&A activity, with sub-categories such as chassis and powertrain systems as the focal points. Not surprisingly, the study also finds that North American buyers are the most likely to drive M&A activity in the supplier space. This is due to their relative financial strength compared to Europe and Japan.
Consistent with the overall Automotive M&A deal market, both financial and trade buyers' M&A activity slowed during H1 of 2012 compared to H1 of 2011. However, the financial buyers' share of M&A volume declined to 22%, levels not witnessed since the depths of the 2008-2009 recession.
Similar to the overall M&A trends, financial buyer activity focused on component suppliers, with nearly 55% of their deals in this space. This is a significant change from last year, when financial buyers increased their focus on the others category, comprised of aftermarket, retail, repair, financial services, etc. From a regional perspective, financial buyers continued to shift away from Europe, gravitating toward deals in more stable economic and operating climates such as the US.
Deal activity outlook positive
PwC's positive outlook for M&A stems from the fact that the global automotive sector is expected to add nearly 30 million units between 2012 and 2018. Given technological changes as well as industry fragmentation, M&A activity will likely continue to be an important option, although the timing for an increase remains uncertain.
According to Elie, "PwC maintains positive expectations for deal activity contingent upon the following conditions: Successful resolution of Europe's sovereign debt crisis; strong economic recovery in developed markets such as the US and Japan; and resumption of trend line economic growth in emerging markets like China and India."