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September 18, 2009

FRANKFURT SHOW: Automotive M&A activity plunges

An M&A specialist has told an industry conference at the IAA that automotive sector M&A activity has plunged and that his analysis of the restructuring cycle and comparison with past recessions suggests that the automotive industry still faces very tough times ahead.

An M&A specialist has told an industry conference at the IAA that automotive sector M&A activity has plunged and that his analysis of the restructuring cycle and comparison with past recessions suggests that the automotive industry still faces very tough times ahead.

Philip Wylie, a director at Houlihan Lokey, told a SupplierBusiness conference at the IAA that leveraged loan defaults in the US are continuing to rise.

“The tendency to blind lending was not just in sub-prime home loans,” he said.

“And private equity players are now having to put a lot more cash in to M&A deals because the banks simply won’t lend.”

Moody’s estimates that US speculative grade default rates will peak at 12.8% in the fourth quarter of this year. 

Wylie says that there has been a plunge in M&A activity – in terms of the number of deals – this year. In Europe M&A activity is running at around 50% of the level seen in 2007/8.

He also told delegates that he believes the world economy and the restructuring cycle have much further to go in terms of adjustment and de-leveraging.

“In these circumstances a rapid double digit growth in car sales in North America or Europe looks optimistic,” he said. “It could be 2011 before any serious recovery materialises.”

As far as restructuring goes, he noted that there is plenty of ‘stressed’ restructuring following bankruptcy and that private equity groups are now showing more interest in the automotive supplier sector because they sense they can buy at the bottom of the market.

“There are some brighter specs on the horizon,” he said. “But it’s a very tough situation and I think there is more trouble ahead.”

Wylie also said that it is in the interests of vehicle manufacturers to help key suppliers in order to avoid supply chain instability. Support could extend to payment terms, pricing, direct financial assistance or helping a vulnerable supplier successfully navigate M&A options that enhance rather than impair stability, he noted.

Dave Leggett
 

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