ZF agrees to purchase TRW

German car parts manufacturer ZF Friedrichshafen (ZF) has reached an agreement to purchase US-based auto safety systems supplier TRW Automotive Holdings (TRW) in an all-cash deal, according to statements released by both companies. ZF will pay USD105.60 per share for all outstanding shares in TRW. The all-cash deal is valued at about USD13.5 billion "on an enterprise value basis", though TRW's market capitalisation is estimated at USD11.46 billion. According to TRW, the share price is a premium of 16% over TRW's undisclosed closing stock price on 9 July and a 15% premium over its all-time high undisturbed stock price of USD91.62, on 7 July - both dates before the potential deal was known. The purchase amount is 7.6 times TRW's adjusted earnings before interest, taxation, depreciation, and amortisation (EBITDA) for the 12 months ended 27 June, a few days after ZF made the first offer.

While ZF says the acquisition will more than double its sales in the US and China, the combined group will generate about half its overall sales in Europe and half in North America, Asia-Pacific, and the rest of the world. Both companies have strong research-and-development (R&D) operations in China, and both are currently expanding. According to ZF's statement, the two facilities are within a 30-minute drive of one another.

ZF is financing the transaction through a combination of corporate cash on hand and debt financing, though the specific split was not announced. ZF had reportedly secured financing of up to USD16 billion for the acquisition (see United States - Germany: 18 July 2014: ZF obtains finance of USD16 bil. to purchase TRW). The deal close is subject to TRW stockholder approval and regulatory approvals, and is expected to close during the first half of 2015. TRW and ZF say the transaction creates a "global leader in the automotive supplier business". Pro-forma combined sales are about EUR30 billion (USD41 billion) and the entity will employ about 138,000 people.

In terms of sales to the automotive industry, ZF and TRW combined will be third-largest global supplier, behind Bosch and Denso but ahead of Continental. Bosch's automotive technology division reported sales of EUR30.5 billion (USD39.4 billion) in 2013, while Denso generated JPY4.03 trillion (USD39.2 billion), equivalent to 98.4% of the total JPY4.1 trillion in financial year (FY) 2013/14 from automotive business. Continental generated 28% of EUR33.3 billion, equivalent to EUR23.9 billion from the automotive business.

The move has been presented as a friendly one and already has the approval of both companies' boards of directors. The CEO of ZF, Stefan Sommer, said: "This is an acquisition in the spirit of a partnership. We look forward to welcoming TRW's employees to our company and are committed to working closely with them to realize the potential of this exciting combination."

In the combined statement, John Plant, chairman and CEO of TRW, said: "We have long respected ZF as a very successful company in our industry with similar values and focus on innovation. This transaction provides significant benefits for our shareholders who will receive full and certain value for their shares, as well as for our employees, customers and communities, all of which will reap the benefits of being part of a larger, more diversified global organisation.  Our employees have shown admirable dedication in growing TRW into the formidable company it is today, and our strong performance is a testament to their hard work."

Sommer added: "The acquisition of TRW fits perfectly into our long-term strategy. The transaction combines two highly successful companies that have remarkable track records of innovation and growth and solid financial positions. We are strengthening our future prospects by enlarging our product portfolio with acknowledged technologies in the most attractive segments."

Outlook and implications

As the two companies had been moving toward this conclusion, including ZF agreeing to sell its stake in a steering joint venture to Bosch (see Germany: 15 September 2014: Bosch agrees deal to acquire majority stake in steering systems JV with ZF), the agreement is not a surprise and the two companies say the deal is a friendly one. The move toward automated driving controls, with many expecting the ultimate path to lead to self-driving cars, the combination of each company's expertise can make for a powerful automotive supplier. The combined company should be well-positioned for the coming decade and relatively well-balanced in portfolio and regional presence.

The USD11.74-billion deal allows ZF to add technology for occupant safety and crash avoidance to its mechanical products, creating a competitive edge for a longer-term future - even with TRW operating as a business unit, both will benefit. Among the elements yet to be finalised is the new management structure of the merged company.

However, the deal presents only a 2% premium over TRW's closing price of USD103.85 on 12 September. That the stock rose during the period of due diligence and negotiation from July to September indicates the stock market approves of the deal, though it did close down 81 cents on the day the deal was announced. TRW stock has generally trended upward since the potential deal was announced.

As we noted in July (see United States - Germany: 11 July 2014: ZF offers to buy TRW Automotive), the acquisition creates little overlap. In the past few years, both companies have benefited from strong recovery in the vehicle sales in North America. The German supplier continues to rely heavily on the European market, which remains fragile despite recent growth. In contrast, vehicle demand is projected to remain robust in North America for the rest of this decade. The combined company will be better positioned to deal with demand fluctuation in these two key markets. Meanwhile, both have focused on international business expansion, specifically on emerging markets in Brazil, China, India, and eastern Europe. In 2013, TRW had a manufacturing presence in 24 countries; ZF operated with 122 production companies in 26 countries.

The acquisition enables ZF to generate growth from the acquisition and new synergies and product development neither company is likely to be able to do on its own. ZF's 2013 turnover was less than TRW's, however, and the company must ensure it does not overstretch itself to make the purchase. As long as the markets and shareholders are receptive of the deal, the new entity has the potential to be a supplier of sophisticated systems and components that will help aid the automotive industries shift to increased automation and electrification.