Bloomberg News

Visteon in China Means Earnings Are Free in Takeover: Real M&A

June 16, 2011

June 16 (Bloomberg) -- Visteon Corp. is so cheap that the auto-parts supplier is offering potential acquirers its earnings for free.

Visteon fell 16 percent this year through yesterday, leaving the Van Buren Township, Michigan-based company with $3.17 billion in market capitalization. That’s now less than the combined value of its stakes including Halla Climate Control Corp. and Yanfeng Visteon Automotive Trim Systems Co., according to data compiled by Bloomberg. Its 50 percent holding in Yanfeng alone may sell for $1.4 billion, based on the median earnings multiple for comparable auto-parts producers, the data show.

While Visteon exited bankruptcy in October and has the lowest operating margin of any auto-parts maker in the world, it may attract Johnson Controls Inc. and Valeo SA, UBS AG said. A buyer would gain Visteon’s venture in China, the world’s biggest auto market, and earnings that analysts project will increase 25 percent in 2013. Based on the value of all its businesses, Visteon is worth $90 a share, or 45 percent more than its price yesterday, according to Westwood Holdings Group Inc.

“If Visteon could get a competitive situation going, they could do very well,” said Kirk Ludtke, an automotive analyst at Stamford, Connecticut-based CRT Capital Group LLC. “Just about all the major suppliers are trying to boost their exposure to China. Assets of the scale and quality of Yanfeng and Halla rarely change hands.”

Sum of Parts

Jim Fisher, a spokesman for Visteon, declined to comment, as did Paul Mason at Johnson Controls. Fabienne de Brebisson, a spokeswoman at Valeo, said today that Visteon is “absolutely not on the agenda.”

Visteon, spun off from Ford Motor Co. in June 2000, makes heating and air-conditioning systems, instrument panels and clusters. It counts Hyundai Motor Co. of Seoul and Dearborn, Michigan-based Ford among its biggest customers.

While Visteon has gained 25 percent since returning as a publicly traded company last year, the shares have slumped since reaching a high of $75.75 in January. After falling to an eight- month low last week, Visteon has rallied in the past three days as speculation increased it may become a takeover target. The stock closed at $62.06 yesterday.

At that level, Visteon is now cheaper than the sum of its parts, according to data compiled by Bloomberg. Visteon’s 70 percent stake in Halla Climate, the Daejeon, South Korea-based maker of air conditioning systems in cars, is valued at $1.63 billion, or about $32 a share, the data show.

‘Left for Dead’

Visteon also owns half of Shanghai-based Yanfeng, which earned $218 million in net income last year. Based on the median price-earnings ratio of 12.7 times for auto-parts suppliers with market values over $1 billion, Visteon’s venture with China’s largest carmaker, SAIC Motor Corp., may be worth as much as $27 a share, the data show.

Together with its other non-consolidated affiliates, the stakes are valued at about $68 a share, or $6 more than Visteon’s price yesterday. That means investors are undervaluing the business as a whole, according to Grant Taber, a Dallas- based money manager at Westwood Holdings, which manages $13.9 billion. Using his own sum-of-the-parts calculation, Taber estimates that Visteon could be worth as much as $90 a share.

“You’ve got an opportunity to potentially loosen things up by selling parts or the whole or breaking it up,” said Taber, whose firm was among Visteon’s 10 biggest shareholders as of March, according to data compiled by Bloomberg. “Based on the sum of the parts, it could be a reason they would want to sell. It’s being left for dead right now on a valuation basis.”

Financial Analysis

Today, shares of Visteon rose 4.2 percent to $64.68, the biggest advance in three months.

Taber says Visteon can cut more costs to boost its profits. The company earned less than a penny in operating income for each dollar of sales in the past 12 months, the lowest among auto-parts makers with more than $1 billion in value, the data show. The median supplier had a margin of 7.22 percent.

Profitability will also increase as Visteon wins back more customers, he said. Once the second-largest U.S. maker of auto parts, Visteon emerged from bankruptcy last October after filing for protection from creditors in May 2009.

The former division of Ford was hobbled by its labor costs, the faltering economy and slowing auto sales.

There’s an “opportunity for Visteon to expand margins to peer levels as management begins to run the company for growth rather than with the goal of bankruptcy,” Colin Langan, a New York-based analyst at UBS, wrote in a note to clients yesterday. Visteon is a “solid takeout candidate,” he said.

Clean Slate

While the company once relied on sales to Ford, Visteon now gets about 40 percent of its revenue from Asia, data compiled by Bloomberg show. Including results from unconsolidated joint ventures, Visteon gets 56 percent of its sales from the region.

Bankruptcy also helped rid Visteon of most of its debt. The company now has more net cash than any U.S. auto-parts supplier except Southfield, Michigan-based Lear Corp., the data show.

“This company is in far better shape balance sheet-wise coming out of bankruptcy,” said Dan Veru, chief investment officer at Fort Lee, New Jersey-based Palisade Capital Management LLC, which oversees $3.8 billion. “They are addressing the emerging markets. That’s where the big growth is. There’s clearly value there.”

Visteon’s businesses in Asia may entice buyers that want a larger foothold in China. Almost 16 million vehicles were sold in China last year, more than double the number in 2007, according to data compiled by Bloomberg Industries. In the U.S., unit sales fell by 28 percent over the same period.

Potential Buyers

Johnson Controls, the largest U.S. auto supplier, is the most likely candidate to buy Visteon, said Jeff Bencik, a New York-based analyst at Kaufman Bros. LP. Milwaukee-based Johnson Controls could take advantage of Visteon’s presence in Asia, while adding products it doesn’t currently sell, he said.

“It’s a natural augmentation of what they do already,” Bencik said. “This would expand their reach into the automotive supplying of the business. It certainly makes a lot of sense.”

Visteon’s Yanfeng venture more than doubled sales in the last two years and tripled profit, according to the company’s annual report.

Johnson Controls has already tried to buy Visteon’s interiors and electronics businesses while the company was in bankruptcy protection last year. Visteon turned down the unsolicited $1.25 billion bid, it said in June 2010.

Valeo, France’s second largest car-parts supplier, could look to purchase Visteon for its Halla Climate business, according to UBS’s Langan. Paris-based Valeo said in March that it was ready to make acquisitions to boost growth and sees opportunities to win more Asian business.

“We’re seeing suppliers looking at strategic acquisitions,” said Mike Wall, an analyst for IHS Automotive. In emerging markets, “they’re really looking to take advantage of those growth rates” in economies such as China, he said.

--With assistance from Rita Nazareth in New York and Mohammed Hadi in Hong Kong. Editors: Michael Tsang, Sarah Rabil.

To contact the reporters on this story: Mark Clothier in Southfield, Michigan, at mclothier@bloomberg.net; Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Jamie Butters at jbutters@bloomberg.net.


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