KKR’s Calsonic Bets on FCA’s Magneti Marelli

By Giacomo Barbieri, Giovanni Coccioli and Alessandro Strinati

Introduction

In the first half of 2019, the Japanese car components manufacturer Calsonic Kansei Corporation, owned by the U.S. private equity firm KKR, expects to complete the acquisition of Magneti Marelli, an Italian-based high-tech car components manufacturer currently owned by Fiat Chrysler Automobiles. The transaction values Magneti Marelli at €6.2 bn, and it will create a giant in the OEM (Original Equipment Manufacturer) arena, becoming a supplier of both FCA and Nissan.

Target Overview

In July 1919, Fiat and Ercole Marelli jointly founded an electric devices and engines firm which became Magneti Marelli. With a turnover of € 7.9 billion in 2016, about 43,000 employees, 85 production units and 15 R&D centers, it operates in more than 20 countries worldwide. Magneti Marelli supplies all the leading carmakers in Europe, North America, South America and Asia.  In 2017, Marelli acquired a stake in LeddarTech, a Canadian company that develops proprietary LiDAR (Light Detection and Ranging) technology for autonomous vehicles and driver assistance systems. They are now in joint development of this technology for autonomous driving, giving KKR exposure to upside in this vigorous market.

The business area covered by Magneti Marelli consists of:

Automotive lighting Power trains
Suspension systems Several electronic systems
Exhaust systems Aftermarkets parts & services
Plastic components & modules Motorsport components

The mission of the company is to apply its transversal know-how in the electronics field to develop intelligent systems and solutions, thereby contributing to the future of mobility.

Acquirer Overview

Founded in 1938 and originally a radiator manufacturer, the Japan-based firm had been acquired by Nissan in 1954. Through the years, the company diversified into production of various car components and transformed itself into one of the major global OEMs. Calsonic’s business is based on the development and production of highly specialized car components, among which include:

Cockpit modules Heat exchange products
Interior products Climate control systems
Electronic products Compressors

Today, Calsonic operates in 15 countries, employing more than 22,000 people worldwide, generating sales of around $10 bn. Given its promising future, KKR bought the company in 2016 for $4.5 bn. The original aim of KKR, as stated by the head of KKR Japan Hiro Hirano, was to help Calsonic expand internationally amid a shrinking home market and to be less reliant on Nissan for its revenues. Just two years later, Calsonic is announcing a further expansion with its acquisition of Magneti Marelli and, as part of the agreement, it will be supplying car components to FCA.

Deal Structure

The agreement between FCA and KKR’s Calsonic Kansei was for a price of €6.2 bn. ($7.14 bn.), excluding debt. The Japanese OEM has been in talks with FCA for months and had already advanced an initial proposal of €5.8 bn, which at the time had been rejected by FCA. The deal, announced on October 21st, will be an all-cash transaction for all the equity of Marelli. The deal is backed by €5 bn. ($5.9 bn.) raised from Japanese banks. The senior loans stand at 5 times Magneti Marelli’s core earnings, and adding junior loans, 6.5 times.

Market Response – A Mutually Beneficial Deal

The market reacted positively to the deal, with FCA’s shares rising 5% at market open. Many analysts think that this was mainly due to the fact that FCA represents a more attractive M&A target after the divestiture. However, the price action may also simply be a consequence of the markets perceiving substantial value creation with the acquisition.

The divesture of Magneti Marelli was part of the 2018-2022 FCA business plan, which originally involved listing it on the Milan stock exchange. However, market conditions had deteriorated mainly due to global trade tensions and political uncertainty in Italy, and as a consequence, FCA tested the waters with various potential acquirers. They received offers for Magneti from, among others, Samsung Electronics (for the entirety of the company), and PE firms like Apollo Global Management, Bain Capital and India’s Mahindra for specific parts of the business. Sergio Marchionne was averse to dismembering an “Italian Jewel” for the prices offered, and so declined all proposals. In the meantime, KKR loomed over the whole process being the new owner of a compatible company interested in international expansion as well as having close connections with top management and stakeholders of Fiat Chrysler.

KKR considered Magneti Marelli as the ideal target for Calsonic to become a worldwide OEMs supplier, and the rationale behind this mutually beneficial transaction begins with promising cost synergies. The merger will give birth to the seventh largest independent car component supplier with more than $17 billion in combined annual revenue and about 65,000 workers from Tokyo to Milan. With many areas overlapping each other and capacity to eliminate redundancies, the new entity will benefit from cost synergies and scale advantage.

Additionally,  the acquisition is in line with KKR’s general strategy regarding their Calsonic investment. KKR bought Calsonic with the idea of making it grow and eventually divesting. The choice of merging with Magneti is not surprising as it is a move consistent with a “buy-and-build” PE strategy. Fundamentally, they want Calsonic to enjoy synergies and bulk up before exiting at as high a multiple as possible, and the Magneti acquisition helps KKR achieve this objective for the following reasons:

  1. Thanks to the supply agreement embedded in the transaction, KKR will be able to further move towards its original goal of having Calsonic become less reliant on Nissan, currently its main customer. Given the fact that value should be realised from synergies and the broader customer base post-transaction, the multiple of the business will further expand due to these fundamental improvements.
  2. Since in the automotive industry economics of scale are so critical, OEMs keep expanding in new markets to better exploit their production capacity. To a global OEM, as Calsonic intends to become with acquisitions like Magneti, partnering with a global component supplier would mean reducing time-to-market and improving the cash conversion cycle. As a result, the new entity will be more appealing in the M&A markets, garnering a higher multiple.

The FCA shareholders also stand to benefit from the acquisition. They haven’t received dividends for an extended period of time, so rather than having a spin-off Magneti Marelli and distributing its shares to existing shareholders, the all-cash deal with Calsonic will enable FCA to start paying the cash dividend again in 2019, as Sergio Marchionne had planned.

The Advisors

UBS and Morgan Stanley, together with Dentons as the legal counsel, are the advisors for KKR’s Calsonic, while FCA’s Magneti Marelli is assisted by JP Morgan and Goldman Sachs, with Sullivan & Cromwell as legal counsel.

 

Editor Responsible: Stefan Larsen

Authors: Giacomo Barbieri, Giovanni Coccioli, Alessandro Strinati

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