On July 8, 2003, Standard & Poor's Ratings Service placed its 'BB+' corporate credit and senior unsecured debt ratings on ArvinMeritor (ARM) on CreditWatch with negative implications following the announcement that ArvinMeritor has commenced an unsolicited cash offer, having a $4.4 billion enterprise value, to acquire all outstanding common shares of Dana Corp. (DCN) In addition, Standard & Poor's placed its 'BB' corporate credit and senior unsecured debt ratings on Dana on CreditWatch with negative implications.
Troy, Mich.-based ArvinMeritor and Toledo, Ohio-based Dana are both global suppliers of systems, modules, and components to the light- and heavy-duty motor vehicle industry. Revenues for ArvinMeritor and Dana were about $7.3 billion and $9.5 billion, respectively, for the 12 months ended March 31, 2003.
The CreditWatch listing reflects the potential for lower ratings, given the significantly increased pro forma leverage to complete the acquisition of Dana and ArvinMeritor's ability to generate financial measures appropriate for the current ratings.
The acquisition could produce a somewhat stronger business position for the larger ArvinMeritor in the highly competitive auto supplier industry, given the complementary nature of the products manufactured by the two companies. However, the acquisition, if completed at the offered price, would add about $2.4 billion of new debt to the capital structure of the combined company. This incremental debt would reduce credit quality unless the higher leverage was mitigated by sufficient near-term cash flow from operations, asset sales, or the issuance of some equity.
Furthermore, it is possible that a higher price may be required to consummate the transaction. In addition, an acquisition of this magnitude would entail significant execution risk during an already challenging period for the auto supplier industry.
Standard & Poor's anticipates that resolution of the CreditWatch listing on ArvinMeritor and Dana will involve examining the proposed financial structure of the transaction, the pro forma financials of the combined firm, and the combined business model to determine the final ratings outcome.