Auto Parts Suppliers Rebound While PE Waits on Sidelines

Unlike the Big Three carmakers, small auto parts suppliers didn’t crash and burn with the recent market downturn.

In 2008, when GM had yet to file for bankruptcy and a merger of the Big Three automakers was still being discussed, many auto parts suppliers were expected to merge or file for bankruptcy. Some big ones went down, but smaller suppliers, like SRG Global, survived the downturn and are doing well.

“People expected a lot of consolidation to happen where larger companies bought smaller ones or a lot of bankruptcies,” says Mike Benson, a managing director with Stout Risius Ross Advisors. “Neither of those happened. In fact, lots of smaller companies that people thought were washed out, just barely survived.”

Smaller suppliers survived by dramatically cutting their cost base, including reducing personnel and shutting plants. “As painful as it was, it’s gotten to the point where there are not any sacred cows left,” Benson says.

A recent uptick in auto production volume means the suppliers can be more profitable. J.D. Power recently forecast North American new vehicle retail sales will hit 14.2 million units this year, a 12% jump from 2009. “People are very guardedly optimistic that there is rebound,” Benson says.

With a rebound, come whispers of sales and mergers. Weaker firms, those will no differentiators and a “me-too” book of business can sell for 2.3 to 3x EBITDA. These would be more asset sales, Benson says. “They are worth more in liquidation than a going concern,” he says.

On the other side, companies with a diversified customer base and higher barrier to entry, can sell for a higher multiple of up to 5x EBITDA, Benson says. But this is still on the lower end of the M&A market, Benson says.for example, some healthcare firms are selling for 9 or 10x EBITDA.

PE shops used to be investors in the automotive industry. Cerberus, in 2007, bought an 80% stake in Chrysler. They lost that stake in 2009 when Chrysler filed for bankruptcy. Heartland Industrial Partners, the PE shop founded by David Stockman, invested in Collins & Aikman, an auto supplier that once made pieces for nearly every U.S.-built car. Collins & Aikman shut down in 2007.

In the current market, buyout shops are waiting on the sidelines. “It’s a sign that there is still a lot of uncertainty,” Benson says.

Benson expects Tier 1 firms to spin out their non-core businesses, which would provide buying opportunities for smaller firms and buyout shops, Benson says. PE firms like “chunks” of Tier 1 businesses that have some proprietary technology, he says. “For PE firms, there hasn’t been a lot that has been interesting recently,” he says.