Hitting the road

As the beleaguered US automotive parts sector looks to shed assets, a few funds have already lined up to take advantage of the deals. By Aaron Lovell.

As the troubled US auto makers shed their own non-core business lines, suppliers to General Motors and the Ford Motor Company are also looking at ways to improve their sagging financials. Many of these auto parts manufacturers are looking to increase cash flow by streamlining and jettisoning their non-essential product lines and businesses – and some distressed funds are looking to scoop up these assets at cheap prices.

Following the lead of the auto companies, parts manufacturers and suppliers, like Delphi, the largest auto parts maker, are reportedly looking to sell off non-core assets. The move could create a number of distressed opportunities for savvy investors looking for deals in the $500 billion (€416 billion) auto parts sector, as other players, like former Ford Motor Company parts arm Visteon, parts company ArvinMeritor, Toledo-based supplier Dana, and tyre maker Goodyear Tire & Rubber look to increase cash flow via asset liquidation.

The number of bankruptcies in the sector could also be a sign of the number of distressed deals coming down the pike. The high-profile Chapter 11 filing by Delphi –GM’s former parts division, which had around $22.2 billion in assets and $17.1 billion in debt – in October made headlines around the world.

While Delphi is the largest player, it is by no means the only auto parts company seeking bankruptcy protection recently. Fraser, Michigan-based Jacobs Industries, which supplies door parts, window frames and truck beds to GM, DaimlerChrysler and other suppliers, filed for protection this autumn, along with Tower Automotive, Harvard Industries, Meridian Automotive Systems and Collins & Aikman.    

So as the market is flooded with sellers, distressed investors are sure to try to pick up some of the companies at a steep discount. Last week, the private equity arm of merchant bank Bear Sterns picked up Transamerican Auto Parts, a firm that makes after-market parts and accessories for trucks and sport-utility vehicles. There has also been speculation that New York-based hedge fund Cerberus Capital Management, which acquired GDX Automotive in the summer of 2004 for $147 million, might look for investments in the space.

Investor Wilbur Ross has already set up vehicles to take down deals in the distressed auto parts sector, including plastic interiors, metal parts and safety components. Ross’ International Auto Components Groups has $4.5 billion to spend and plans to build itself into a major supplier.

Ross recently acquired 25 percent of Europe-focused, Troy, Michigan-based Oxford Automotives and is taking the company through a $100 million recapitalization. Ross has also acquired the European assets of bankrupt parts maker Collins & Aikman, as well as an airbag fabric and cushion maker.

Ross is by no means the only distressed investor looking at plays in the sector. New York-based KPS Special Situation Funds is also reportedly looking to roll up fire-sale auto parts companies into platforms it has created for plastic and metal component companies. In September, the firm’s second vehicle acquired Chicago-based Jernberg Industries, which makes power-train and wheel-end parts for use in the automotive industries. The same month, KPS purchased Blue Water, a Marysville, Michigan-based firm that manufactures air flow ducts, air exhausters, fender liners, functional trim and interior trim for automobiles.  

There will probably not be a dearth of opportunities in the auto parts sector: the trick will no doubt be choosing the right companies.