Make a note in your diary of May 9. It's the day of Valeo's annual meeting. Actually, mark May 10 as well - this one could overrun, just like BMW's infamous annual meeting in February 1999 which resulted in the resignation of Wolfgang Reitzle and the ousting of boss Bernd Pichetsrieder. The root cause of Valeo's problem is not dissimilar: growing by acquisition, some of which might prove to be ill-judged. There is unlikely to be a coup, but the board can expect a rough ride from shareholders. Anthony Lewis reports.

On April 10 the French components company denied, curtly, a Financial Times report that it was in negotiation with Johnson Controls to sell part of its business. The FT believed that Valeo was about to announce the sale of its electric motors business. Non! said Valeo, currently ranked as the world's tenth largest supplier, and Europe's second largest. The group is, by its own admission, going through its worst crisis in 15 years. Shares in Valeo hit a high of euro82 in January 2000. Currently they are bumping along in the mid-forties.

Valeo stock fell to a four-year low of 43.10 in January
Operating income down 62%

At a board meeting on April 12 it announced a 20 percent fall in sales in North America and four percent fall in Asia, offset by a modest six percent rise in Europe and eight percent in South America. The overall effect was operating income down 62 percent, made worse by a 30 percent increase in selling and administrative expenses which rose to 6.8 percent of sales against 6.3 percent in 2000. Net loss for the quarter totalled euro179 million, 6.6 percent of sales, compared with a profit of euro 82 million, 3.7 percent of sales, in 2000. Hardly surprising that when the markets opened for business after Easter, Valeo stock fell to euro44.3, not far from its four-year low of 43.10 in January. Immediate action to change the company's fortunes will include simplifying and decentralizing its administrative management. Shareholders will be asked in May to approve the establishment of a two-tier board, supervisory and management.

Navarri sacked

Last month, Andre Navarri, aged 48, was sacked as chairman, ten months after succeeding Noel Goutard, the 69-year-old visionary of the company who had been at the helm since 1987. Navarri joined Valeo in May 1999 from French transport and power engineering company Alstom. At the time, it was assumed that he was Goutard's personal choice as his successor, but now Goutard, frequently seen as autocratic, or 'feared but respected' depending on your view, is distancing himself from Navarri's appointment.

Last month Andre Navarri was sacked as chairman

Goutard will return as chairman, expected to oversee long-term strategy, while Thierry Morin, is promoted from chief operating officer to CEO. Morin, who will head a more hands-on management is a long-time ally of Goutard, who will take charge of the supervisory board. These changes came about after the direct intervention of Ernest-Antoine Seilliere, chairman of Compagnie General d'Industrie et de Participations (CGIP), a French holding company which owns 20 percent of Valeo and has 28 percent of the voting rights. CGIP paid euro56.8 per share five years ago and is rumoured to be keen to sell its stake - but obviously at a profit. CGIP has four seats on Valeo's board, and Seilliere is also head of Medef, the French employers' federation - a surefire way to keep Valeo's activities in the public eye. With Seilliere taking more interest in his investment and Goutard back, Valeo's managers will have to come up with a strategy to get back on track.

Sticking to the old adage that if you are not the leader or a close-run second in any sector, then get out, will be a good starting point - and presumably what has given rise to the rumours of selling the electric motors business to JCI.

So what's gone wrong?

We need to go back to the late 1980s when Goutard rescued an ailing Valeo that had diversified unwisely. Goutard cut costs, sold non-core businesses and started on the acquisition trial, culminating in the purchase of the electrical systems business of ITT Automotive in the USA for euro1.9bn in the summer of 1998. Then at the Tokyo motor show of October 1999, Valeo was one of the first European suppliers to take advantage of the wave of restructuring in the Japanese supply business following Renault's takeover of Nissan. It announced that it was talking to a number of companies about strategic alliances. By last summer it had formed alliances with Zexel (transmissions) and Ichikoh (lighting). These were hailed as far-sighted as was the alliance in cockpit modules with Textron.

The moves in Japan were seen as a sensible counterbalance to possible overexposure in the US. But integrating the Japanese businesses, as well as problematical ITT whose plants had been starved of investment, has not been easy. Toyota and Nissan are both squeezing suppliers as the US market continues to struggle.

Delphi or Siemens could become interested in aquiring Valeo

Last year the North American market amounted to 29 percent of Valeo's total sales. Valeo has 22 plants in North America and cut its workforce there last year from 12,200 to 10,750. It is now axing a further 1,000 jobs, with 580 expected to go in the UK and a possible 600 in France. Production is being shifted to countries such as Poland and Mexico and by the end of this year around 30 percent of Valeo's workers should be in low-cost regions.

What can Goutard and Morin do?

In some ways Valeo appears to be a victim of its own hype. It expanded by acquisition in core areas, generally seen as a good move. But it had already allowed smaller competitors to overtake it. Goutard did not embrace the modularisation theory, falling behind Hella in front end business and having to form the alliance with Textron to catch up in cockpits. R&D investment, as a percentage of sales, has not been as high, historically, as its competitors and it has probably been off the pace in seeing how quickly the electronics side of the automotive business would take off.

At the April 12 meeting the board said that it would concentrate on the four transmissions and thermal systems branches (clutches and air con to you and me), the historical heart of Valeo. Lighting, wiper systems, electrical power generation, security systems, wiring and switches are also seen as core businesses in which Valeo is either No 1 or close to No 1 worldwide. The problem will be finding companies that want to buy the bits that Valeo doesn't want any more - or indeed, a buyer for the whole of the company. That is now back on the agenda following Jean Martin Folz, chairman of PSA and one of Valeo's biggest customers, saying that he would not object if Valeo fell into foreign hands. Faurecia, PSA's own supplier, is ruled out though because of its recent acquisition of Sommer-Allibert. Siemens of Germany would be a good fit, as would Delphi Automotive Systems. But Delphi is too busy sandbagging its US operations while Siemens, the world's 30th largest supplier with revenues of euro 3.8bn, is less than half Valeo's size.

This one is set to run and run.


To view related research reports, please follow the links below:-

IMS Corporate Profile - Valeo

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