Private Equity Revs Up Auto Parts

But S&P says investors sniffing for opportunities in the sector may have missed the chance to catch a ride

Private equity money and management plan to fix the auto parts and equipment subindustry, a trend Standard & Poor's believes has resulted in higher stock prices for the industry and a selling opportunity for shareholders in select companies.

Year to date through Mar. 16, the subindustry was up 11% as investors bid up shares hoping for more companies to be acquired or bidding wars to ensue. In fact, the board of directors at parts and equipment manufacturer Lear (LEA; S&P investment recommendation 3 STARS, hold) said on Mar. 20 it's recommending that shareholders vote in favor of the company's takeover by a legendary value investor who already owns 16% of the company.

The $5.3 billion deal originally proposed Feb. 9 by Carl Icahn's American Real Estate Partners values Lear at $36 a share. A competing bid at a higher price has not materialized.

Too Late for a Lift?

For 2007, S&P's domestic original equipment (OEM) sales outlook is modestly negative because we expect the Big Three carmakers to collectively lose share to foreign brands this year and next. "The greater a supplier's exposure to domestic companies, in our opinion, the greater the impact. Overall, we see profitability for the subindustry weakening vs. a year ago," Levy says.

Stock investors considering an entry point in auto-parts shares appear to have missed the ride up. "There's a takeover premium included in the share prices today of auto parts companies because private equity has been interested in this space. The anticipation of a deal has bid up prices," Levy says.

S&P believes cash-rich private equity firms are betting that the subindustry can turn around in a few years. After all, it may take a few years for beleaguered domestic carmakers General Motors (GM; 3 STARS), Ford (F; 3 STARS), and Chrysler's parent DaimlerChrysler (DCX; 1 STARS, strong sell) to complete the U-turn currently under way. Levy thinks car-parts suppliers' effective and competitive plan to return to profitability may be stalled by the automakers themselves.

The Blackstone Maneuver

On Mar. 20, shares of Visteon (VC; 2 STARS, sell), the former Ford parts unit, were up more than 3% on a Reuters report that Pardus, a hedge fund that owns 17.5% of Visteon, is looking to merge it with Valeo, another car company in which it owns a stake. Visteon, which has been open to selling off parts or to a takeover, has experienced share volatility this year, and will likely experience more. The deal was ultimately rejected later that day, and shares were trading down more than 4% in after-market trading on Mar. 20.

TRW (TRW; 3 STARS), whose shares are up more than 30% since the beginning of the year, is controlled (but not wholly owned) by private equity firm the Blackstone Group. The firm took the company public in 2004 after acquiring it, selling off parts of the business, and showing interest in acquiring other businesses that may complement TRW's core operations.

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