Adient has announced that as part of its strategic transformation in China, it has entered into definitive agreements with joint venture partner Yanfeng Automotive Trim Systems Ltd. (YF) to end its Yanfeng Adient Seating Co., Ltd. (YFAS) joint venture in China.

Adient says that the transactions contemplated by these agreements will, upon closing, allow Adient to drive its strategy in China independently, which is expected to “result in a variety of benefits, including capturing growth in profitable and expanding segments; improving the integration of the company’s China operations; and allowing for more certain value realization relative to status quo, where cash and value are generated from dividends at entities not in Adient’s control.”

“These pending transactions offer Adient an opportunity to drive our China strategy independently and further position the company for future growth in the world’s largest automotive market,” said Doug Del Grosso, president and CEO of Adient. “In addition, proceeds from the transactions will provide immediate value to Adient’s stakeholders.”

Details of the transactions

Under the agreements, Adient will sell its 49.99% interest in YFAS to YF and its minority interest in certain other joint ventures and will receive ~$1.5B in cash (~ $1.4B after tax) and will acquire YFAS’s 50% equity interest in Chongqing Yanfeng Adient Automotive Components Co., Ltd. (CQYFAS) and YFAS’s 100% equity interest in Yanfeng Adient (Langfang) Seating Co., Ltd. (YFAS-LF).

Upon acquiring YFAS’s interests in CQYFAS and YFAS-LF, Adient would consolidate those businesses going forward. YF will operate the remainder of YFAS as a wholly owned enterprise.

The transactions, which are subject to customary government and regulatory approvals and certain PRC state-owned asset required approvals and processes, are expected to be completed in the second half of calendar year 2021. Adient will receive ~$800 million in cash by closing of the transactions (including dividends) and ~$700 million in cash prior to calendar year end, even if closing occurs before such time. All of the foregoing amounts of YFAS transactions proceeds are based on the current USD to RMB exchange rate.

In conjunction with the YFAS transaction, Adient has signed an agreement with Chongqing Boxun Industrial Co., Ltd. (Boxun), its joint venture partner in CQYFAS. The agreement provides Boxun with a put right to sell and, if exercised, requires Adient to buy Boxun’s 25% interest in CQYFAS. The put right, valued at ~ $125M, is contingent upon the closing of the YFAS transaction. After closing, if Adient buys Boxun’s 25% interest, Adient would own 100% of CQYFAS.

Proceeds from the transactions are expected to be used by Adient to pre-pay a portion of the company’s debt; fund Boxun’s put right, if exercised; and for general corporate purposes.

Remaining a market leader in China

Upon the closing of the various transactions, Adient’s China business is projected to have ~$4.5B in annual consolidated and unconsolidated sales, with far-reaching customer and geographic coverage through its nine major entities, three state-of-the-art technical centers and more than 800 engineers.

Compared to the company’s FY21 outlook, once the transactions close, global consolidated sales and Adj.-EBITDA are expected to increase annually by between $700M-$800M and between $90M-$100M, respectively. In addition, Adient’s equity income post-closing is expected to decline annually by ~$155M. Net income and EPS improvement is forecast post-closing, driven by the expected significant reduction in debt and the corresponding benefit of lower financing costs.