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TRW Falls on News of Buyout Deal by ZF Friedrichshafen

Shares of TRW Automotive Holdings Corp. (TRW) decreased 0.1% to $102.95 on Sep 16, after the company announced that it will be acquired by ZF Friedrichshafen AG. The latter will invest $13.5 billion to buy all outstanding shares of TRW at $105.60 per share. The transaction is expected to end by the first half of 2015 subject to receipt of stockholders’ and regulatory approvals and other customary closing conditions.

ZF Friedrichshafen will be purchasing TRW’s shares with the cash on hand, together with debt financing by Citigroup Inc. (C) and Deutsche Bank AG (DB). The acquisition price is at a premium of about 16% and 15% over TRW's undisturbed closing stock price of $91.40 on Jul 9, 2014 and all-time undisturbed high price of $91.62 on Jul 7, 2014, respectively. The acquisition price is 7.6x multiple of TRW's adjusted EBITDA for the 12 months ended Jun 27, 2014.

After this acquisition, the combined company will emerge as the global leader in the automotive supplier business with combined sales of €30 billion ($41 billion) and 138,000 employees. The new company will be offering products with leading technology that will provide better fuel efficiency, meet increased safety requirements and facilitate autonomous driving. Moreover, post the buyout, TRW will operate as a separate business division within ZF Friedrichshafen.

ZF Friedrichshafen is a very successful company that focuses on innovation. It is expected that this merger will be beneficial to shareholders, employees as well as customers as they will be part of a larger and more diversified global organization.

Post acquisition, ZF Friedrichshafen will be able to increase its sales by twofold in China and U.S. The company expects to increase its annual sales volume in the U.S. to €6.5 billion ($9.0 billion) from €2.8 billion ($3.9 billion).

Both ZF Friedrichshafen and TRW enjoy a strong position in China in addition to owning major production sites and strong R&D operations. Sales from China account for about two thirds of ZF Friedrichshafen's total regional sales of €3 billion ($4.1 billion) in Asia-Pacific which it expects to increase to €4.0 billion ($5.5 billion), post-acquisition. In the Asia-Pacific region, annual sales of the combined company is estimated to be €5.4 billion (approximately $7.5 billion).

In addition, the combined company will have a balanced regional and customer mix. This new company will generate half of its business from Europe and the other half from North America, Asia-Pacific and the rest of the world. It will also focus on having a balanced mix of customers in both the premium and the volume segments.

TRW has a strong relationship with the U.S. and European volume manufacturers. ZF Friedrichshafen has a broader customer base and is one of the leading premium car producers.

After the announcement, Moody's Investors Service placed the Ba1 Corporate Family and Ba1-PD Probability of Default ratings of TRW under review for downward revision.

TRW currently has a Zacks Rank #3 (Hold). Visteon Corp. (VC), a Zacks Rank #1 (Strong Buy) stock, is worth considering in the automobile sector.

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