KKR Buckles Up for Wild Ride Chasing Air-Bag Outcast Takata

Takata Surges on Report of KKR Support
  • Scope of recall creates ‘really high’ hurdle to sale: Aoki
  • Private equity bets in auto industry have had mixed success

KKR & Co., the investment firm chronicled in “Barbarians at the Gate,” is buckling in for another wild private-equity ride with the possible takeover of the Japanese air-bag maker behind the biggest safety recall ever.

Takata Corp. is in talks with KKR and other potential saviors, a person familiar with the matter said, even as it negotiates with customers led by Honda Motor Co. over how much of the multibillion-dollar recall bill it will have to foot. Takata jumped by the daily limit on Thursday but its market value of about 35 billion yen ($319 million) is still just a 10th of its 2007 peak.

KKR’s foray into the industry would mark a new turn in what’s been a long and bumpy road for private equity firms. The most high-profile, Cerberus Capital Management LP’s $7.4 billion purchase of 80 percent of Chrysler in 2007, a fifth of what Daimler-Benz AG paid for the company about a decade earlier, looked like a winner. But the credit crunch hit and Chrysler went bankrupt within two years. Takata now poses a set of challenges just as pressing for any buyer.

“The hurdles are really high,” said Takashi Aoki, a fund manager at Mizuho Asset Management Co. in Tokyo. Resurrecting Takata will take winning back a customer base that’s turned away from its troubled air bags and repair fraying ties with companies including Honda, he said.

For a piece about Takata’s short sellers getting caught off guard, click here.

Takata is in the early process of selecting a sponsor and no decision has been made on who will give it support, the company said in a statement to Tokyo Stock Exchange Friday. Steve Okun, a Singapore-based spokesman at KKR, declined to comment.

Takata’s shares fell 8.1 percent in Tokyo after surging 21 percent on Thursday. Japan’s transport ministry on Friday ordered carmakers to recall an additional seven million vehicles to fix air-bag inflators made by Takata.

For Sale

The playbook for taking over what is now a parts supplier responsible for as many as 69 million defective air bags in the U.S. alone was laid out by the company when it announced the hiring of Lazard to find a buyer this week.

A top priority is to ensure an uninterrupted flow to customers of seat belts, steering wheels and other products in addition to the replacement inflators. And then there’s management. Takata said its governance structure needs reforming -- code for cleaning house. President Shigehisa Takada has already said he’s ready to resign to placate investors, a person familiar with the matter said in January.

Any Takata suitor will be betting it can still make a return after resolving claims from automakers, which until now have shouldered the vast majority of the costs of replacing the bags. Recalls of the devices, which can deploy with too much force and spray shrapnel, are expanding by as much as 40 million units in the U.S., after regulators said the death toll rose to 13 worldwide.

Final Tally

The final tally may reach $11.5 billion, according to Takaki Nakanishi, an equity analyst for Jefferies Group LLC. The company also faces a fine of as much as $200 million by the U.S. National Highway Traffic Safety Administration and is under investigation by the U.S. Justice Department.

KKR’s pursuit of Takata may signal renewed interest in the automotive industry for private equity investors as a whole. Such investments accelerated before the global crisis, with more than 470 transactions in 2005 and 2006 in North America alone, according to a report by KPMG LLC. 

Firms that pursued troubled parts makers then included Platinum Equity Holdings LLC, which sought to buy Delphi Corp., the supplier spun off by General Motors Corp. Delphi declared bankruptcy in 2005 and didn’t emerge until 2009.

Success Stories

But there have been success stories, too.

Allison Transmission Holdings Inc., a former GM unit that makes transmissions for trucks, buses and the military, went public in March 2012 with a market capitalization of $4.2 billion, almost triple its value when Carlyle Group LP and Onex Corp. acquired the business in 2007.

And Blackstone Group LP agreed to buy the auto-parts business of TRW Inc., a Takata competitor, in November 2002 for about $4.7 billion. A dozen years later, Germany’s ZF Friedrichshafen AG paid more than $12 billion for it to form the world’s second-biggest auto-parts supplier.

But the sheer scope of Takata’s recall may be too much for even KKR to succeed, according to Mizuho Asset Management’s Aoki.

“Private equity firms are good at cutting off assets, making choices and concentrating resources,” Aoki said. “But in this case, it may not be enough.”

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