Now that Dana Corporation plans to sell its Automotive Aftermarket Group, others may come to know what ArvinMeritor boss Larry Yost knew all along - the Toledo, Ohio, driveline supplier is well down the road to recovery.

Though Yost has been criticised for his awkward effort to buy Dana, it is hard to fault his logic. Dana has understated value.

The $US9.5 billion supplier has received scant recognition among analysts for the turnaround effort led by its late chairman Joe Magliochetti and now carried on by acting boss Bill Carroll.

Selling off the aftermarket units is the latest step in the strategy.

The aftermarket unit makes such replacement products as Raybestos brakes and Wix filters. The division employs more than 15,000 workers worldwide. Sales of about $2.2 billion in 2002 accounted for about one-fifth of the group's total.

The decision to sell the aftermarket operation is a big step in the refocusing of the group that has gone on for the last three years. But it is not the first one.

Dana has been unwinding much of its acquisition program of the 1990s to pay down the debt it built up. It is restoring financial health with a series of piecemeal disposals and a restructuring of its operations. It started to heavily cut its workforce and plants in 2001.

Dana has been trying to improve its margins and dispose of unwanted units in a very choppy environment. But they have started to show through in the bottom line.

In the first nine months of 2003 the company recorded a profit of $154 million, compared with a loss of $173 million in the same period of 2002 (including an exceptional charge of $220 million for accounting changes, restructuring charges and income from discontinued operations).

Carroll has said that with a steadily improving heavy-truck market and stability in the light-truck market he expects a further improvement in Dana's performance next year.
Chief financial officer Bob Richter says the company should make $210-220 million in 2003 and $300 million in 2004, without taking the aftermarket disposal into account.

Dana's other three main business areas were all more profitable than the aftermarket operation in the first nine months of 2003.

The disposal is a significant step along the company's path away from its heritage as a loosely linked conglomerate of automotive-related businesses to a focused supplier with a limited number of core engine, axle and commercial vehicle product areas.

Dana intends to hold on to its engine-related aftermarket Clevite. A private equity group is considered the most likely buyer of Dana's aftermarket operations.

Undervalued

While ArvinMeritor's Yost clearly thinks the company is undervalued by stockholders at present, the financial markets may want to see more evidence of a pay-off from the turnaround effort before rewarding the company with a higher rating.

The stock price fell after ArvinMeritor announced its disappointing final offer on November 17, although it has gradually recovered as analysts affirm their confidence in the commitment of the management to continuing the turnaround.

Until the disposal happens the company may in fact be more vulnerable to acquisition by sharp-eyed private equity funds.

The group has made a large number of disposals over the last three years, including the FTE brake and clutch hydraulics business in Europe.

The move will lead to another big change in the rankings of global automotive suppliers. Dana's aftermarket operations had sales of $2.2 billion in 2002, when Dana was the world's 11th largest automotive supplier. Without the aftermarket operations it would have been lucky 13.

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