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Takata’s $1 Billion Air-Bag Settlement Could Make a Sale Easier

  • Three executives indicted for deceiving regulators, carmakers
  • Company’s exploding air bags linked to 11 deaths in U.S.

Takata Corp.’s agreement to pay $1 billion to settle a criminal investigation removes a hurdle to the air-bag maker’s sale, which the company needs to continue operations and complete the biggest product recall in automotive history.

The Tokyo-based company admitted to hiding the deadly risks of its air bags for about 15 years and agreed to plead guilty to one criminal charge in the settlement, according to court papers. Separately, U.S. prosecutors charged three former Takata executives for their alleged roles in hiding the risks since 2000. The faulty air bags have been linked to at least 17 deaths worldwide.

Takata faces a recall that is expected to cover more than 100 million air bags. Due diligence by bidders including Autoliv Inc. and Key Safety Systems Inc. had to be extended in part because of the difficulty in calculating the potential liabilities, people with knowledge of the talks said last month. The eventual acquirer would have to ensure a stable supply of replacement parts even as uncertainties surround its exposure to future liabilities, including the costs for replacing the air bags.

“The agreement is one of the steps forward but our concern is still big given the company hasn’t shown when and how it would revive,” said Koji Endo, a Tokyo-based senior research fellow at SBI Securities Co. “The settlement fine and restitution fund for individuals and automakers look small compared to what actually happened. There still may be more cost burdens on this company.” 

Restructuring Plan

The delay of the restructuring plan may also mean the prospective buyers or creditors aren’t reaching an agreement, raising the possibility that the discussions could still fall apart, he said.

The $1 billion payment includes $25 million to the U.S. and $975 million to compensate carmakers and people who were injured, according to court papers. While the criminal fine is due within a month, the company doesn’t have to pay the restitution until it’s sold because it can’t afford to pay now.

Takata’s shares fell 11 percent to 949 yen in Tokyo on Monday, after tripling since November. The company’s $692 million in market capitalization is still less than what it has agreed to pay in fines and compensation. It had $641 million in cash and short-term investments as of the quarter ended September.

For more on the faulty Takata air bags, click here.

Civil Fine

Takata’s criminal settlement follows its 2015 agreement to pay a $70 million civil fine to U.S. regulators for providing selective, incomplete or inaccurate information about the air bags. That fine could rise as high as $200 million, if Takata doesn’t finish the recalls in three years, according to the National Highway Traffic Safety Administration.

“This at least gives some clarity to potential bidders,” said Ken Miyao, an analyst at Tokyo-based market researcher Carnorama. “But they also need to know how the recall costs with automakers will be split to make a final decision.”

The settlement is a key milestone in an ongoing process to secure investments in Takata, Chairman and Chief Executive Officer Shigehisa Takada said in a statement. The founding Takada family and trust owns more than 50 percent of the company.

Taking Responsibility

Takada said at the company’s annual meeting in June that he will hand off his job to someone else after the company finds a way to overcome its crisis. Takada told shareholders he will take responsibility in containing recalls and finding a path to restructure the business, a spokeswoman said at the time.

The air-bag maker is leaning toward bids from Autoliv and Key Safety Systems, people familiar with the matter have said. The two gained an edge because of their technical expertise in air-bag systems and safety equipment, and automakers view them as able to lower costs and improve quality of Takata parts.

See here for Gadfly commentary on Takata’s U.S. settlement.

The Justice Department has been wrapping up investigations before Donald Trump’s Jan. 20 inauguration when many of the people who have been overseeing the cases step down. Last week, Volkswagen AG agreed to plead guilty in an emissions-cheating scandal and pay $4.3 billion in penalties. Prosecutors have charged seven people in that case, including five executives still in Germany, and one who pleaded guilty.

“There is little positive for Takata from the announcement, though the $1 billion fine is less than I would have expected in what is now the largest recall in the history of the auto industry,” said Maryann Keller, an independent auto analyst in Stamford, Connecticut. “But this addresses one of the liabilities that confronted the prospective bidders for Takata.”

Bidders for Takata now have to take into consideration the implication of the guilty plea and what that means for future liabilities, she said.

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