Without firm financing for his proposed $US4.4 billion hostile acquisition of Dana Corporation, ArvinMeritor chief executive Larry Yost is fighting a battle against time and, the longer it takes him to line up banks willing to finance the merger, the harder it will be for Yost to win over investors, sceptical bond analysts and motor industry opinion leaders have told the US automotive industry newspaper Automotive News.
The paper said few industry people at the Traverse City, Michigan, automotive industry seminars last week saw much magic in the merger while some “Wall Streeters” say Yost’s promised savings from synergies in a merger – approximately $200 million annually – would be “small potatoes” for a $16 billion company and could easily be swamped by the increase in interest expense for the acquisition.
Automotive News said some US motor industry executives question whether a hostile takeover would poison the post-merger company’s corporate culture.
“There’s an awful lot of animosity between the two management teams,” Tenneco Automotive chairman Mark Frissora told the newspaper. “If a merger were to happen, it could be a difficult situation to contend with.”
For a supplier to assume more debt now is a “very dangerous thing to do,” Centre for Automotive Research chairman David Cole told Automotive News, adding: “The debt that would be created by such a merger makes it a non-starter.”
Automotive News noted that merging Dana with ArvinMeritor would create the world’s seventh largest automotive supplier – with annual sales of $7.3 billion, ArvinMeritor is slightly smaller than Dana, whose revenues last year totalled $9.7 billion.
Automotive News said that Yost’s proposed merger runs into criticism over debt. Yost’s original proposal was to pay $15 per share for Dana’s stock, the paper added, and that would require raising $2.2 billion in cash to finance the acquisition.
ArvinMeritor also would have to assume an additional $2.2 billion in Dana debt, the paper added, leaving it with a debt-to-capital ratio of 88%, one of the industry’s highest debt levels.
Automotive News said Yost may have to raise his bid to persuade Dana shareholders to tender their shares and, if the purchase price rises to $20 per share, ArvinMeritor would have to pay about $3 billion. But investors appear sceptical that the merger will be completed, the paper added.
In a separate report, citing Dana CEO Joe Magliochetti, Automotive News also said that most of Dana’s customers support efforts to thwart a hostile takeover by ArvinMeritor.
Magliochetti told the paper Dana customers do not see any benefit from a merger with ArvinMeritor.
“Yes, I’ve spoken with them,” Magliochetti said, according to Automotive News, adding: “Most are baffled by the logic.” Dana has not lost any business as a result of the takeover attempt, he reportedly added.
Automotive News said ArvinMeritor’s attempted buyout of Dana has raised a red flag from one un-named car maker that buys parts from both companies. The fear is that a Dana takeover would leave the car maker saddled with a large but financially distressed giant supplier unable to deliver promised savings, the paper added.
“Mergers over the last five years have not delivered the cost benefits the supplier companies had hoped for,” a source at the car maker, who requested anomymity, told Automotive News.
According to the paper, the automaker source said his company had analysed the results of the last round of supplier consolidation and has not seen the benefits of its supply base consolidation.
The number of Tier 1s delivering parts to that car maker has declined by more than 10% since 1998, but the number of supplier shipping points in that same supply base declined by less than 5%, Automotive News said, citing its source.
“They merge, but don’t reduce overhead, keeping costs high,” the source reportedly told Automotive News.