merican Axle & Manufacturing Holdings Inc. agreed to acquire Metaldyne Performance Group Inc. for $3.3 billion in cash, stock and debt assumption, creating a supplier with a broad lineup of drivetrain, driveline and powertrain components and systems.
Financial terms of the deal call for Detroit-based American Axle to pay $1.6 billion in cash and stock and assume $1.7 billion in Metaldyne's debt, according to an American Axle statement.
"The combination brings together highly complementary businesses and forms a premier, global Tier 1 supplier with broad capabilities across powertrain, drivetrain and driveline product lines, as well as diversified customer base and end-markets," American Axle said.
American Axle agreed to pay $13.50 in cash and half a share of American Axle stock for each share of Metaldyne.
Once the deal is completed, American Axle shareholders would control 70 percent of the combined company and Metaldyne shareholders would retain a 30 percent stake.
Both companies' boards approved the deal, which remains subject to shareholder and regulatory approval. American Axle said it expects the deal to close during the first half of 2017.
"(Metaldyne's) expertise in complex, highly-engineered powertrain components and its global footprint will be tremendous assets to AAM," American Axle CEO David C. Dauch said in the statement. "We are excited about the powerful industrial logic in this combination that will allow us to create additional value for our customers and other key stakeholders.
"Together, we are forming a company with increased earnings potential and enhanced cash flow generation that will allow us to rapidly reduce leverage while fueling growth and delivering value to our shareholders," Dauch said.
American Axle expects the purchase to result in combined annual cost savings of $100 million to $120 million. The new company would generate about $7 billion in annual revenue, the statement said.
But Wall Street investors didn't like the deal. Shares in American Axle plunged 17.7 percent to close at $13.68 today. Analysts raised concerns about the combined company's debt levels, projected at 2.7 times earnings before interest, taxes and certain other expenses (EBITDA).
"Combined net debt at 2.7 times pro forma 2018 EBITDA could weigh on the shares as the U.S. auto cycle erodes," Barclays wrote in a report today.
Despite the stock performance, analysts still liked cost savings attached to the combination.
"We believe the transaction makes sense for both companies given meaningful cost synergies ($100-120 million) and opportunity for revenue synergies through combine product offering and cross-selling into different geographies," Baird's David Leiker wrote in a report. (For more analysis from Bloomberg News columnist Brooke Sutherland, click here).
The combined company will operate with four business units, Dauch said during a conferene call with investors:
• Driveline, which will manufacture axles and driveshafts and account for $3.7 billion in revenue;
• Metal forming, manufacturing gears, axle shafts, suspension components with revenue of $1.6 billion;
• Powertrain, manufacturing differential assemblies, valve bodies, etc., with sales of $1.1 billion; and
• Castings, which will make axle carriers and steering knuckles with sales of $900 million.
The combined company will also greatly reduce AAM’s reliance on its largest customer, General Motors, Dauch said. Today, the automaker accounts for 66 percent of its revenue. The integration of MPG will reduce GM to 41 percent of sales with plans to reduce that further to 32 percent by 2020.
Private equity firm American Securities, Metaldyne's majority shareholder, will own about 23 percent of the combined company, American Axle said.
Metaldyne, now based near Detroit in Southfield, Mich., was acquired by American Securities in 2012 and merged with Grede Holdings and HHI Group Holdings both majority-owned by American Securities to create a new combined corporate entity in 2014.
Dauch will remain chairman and CEO of the combined company and its board of directors will expand to 11 members to include three members recommended by American Securities and Metaldyne Performance Group CEO George Thanopoulos.
Metaldyne specializes in ductile iron castings for steering knuckles, control arms and differential cases, and produces forgings, powdered metal parts and machined components. The supplier's customers include Ford Motor Co., GM, Fiat Chrysler and ZF Group. The company also has customers in the industrial sector.
American Axle was formed in 1993 by the spinoff of five GM axle and forging plants.
Metaldyne employs about 12,000 and generated $2.5 billion in revenue in 2015.
American Axle plans to open a $30 million advanced technology development center before year’s end in Detroit. It’s unclear whether the company will integrate Metaldyne's engineering operations into the new center.
Separately, American Axle said its third-quarter earnings gained 1.3 percent to $61.7 million. The results included a one-time $3.4 million asset-impairment charge and $700,000 for acquisition-related expenses, the company said.
Sales grew 3.6 percent to $1.0 billion for the quarter. For the first nine months, sales hit $3.0 billion from $2.9 billion during the same period last year. Non-GM business fell to $965 million from $994 million during the same nine months a year ago.
"AAM's third quarter financial results continued to reflect strong production volumes and solid performance in our global manufacturing operations," Dauch said in a statement. "Our year-to-date financial performance positions AAM to achieve record sales and profit in 2016."
American Axle, which employs about 13,000 people, ranks No. 55 on the Automotive News list of the top 100 global suppliers with worldwide sales to automakers of $3.9 billion in 2015. Metaldyne ranks No. 76 on that list with worldwide sales to automakers of $2.5 billion last year.
Source: Automotive News