Automotive transactions and trends 1H16 Global automotive mergers and acquisitions review Produced by Global Markets EY Knowledge
Contents Executive summary 01 Analysis by deal sizes Cross-border deals in 1H16 Transaction drivers for the automotive value chain Automotive sub-sector transaction trends and drivers Capital and M&A outlook EY s Capital Agenda considerations for key stakeholders 03 04 06 07 11 12 Mark Short EY Global Automotive and Transportation Industry Leader, Transaction Advisory Services Digital disruption and innovation are driving the automotive M&A environment The automotive sector has accepted the reality of an extended low-growth global economic environment, with modest or stable growth expectations. Despite strong deal fundamentals and a healthy deal environment, automotive transactions slowed during 1H16, likely attributed to the Brexit, the US presidential election and moderating growth in China, among other drivers. Low interest rates, high levels of corporate cash and access to financing continue, however. If current economic worries prove to be short-lived, we could see transactions, particularly in the mid-market, pick up toward the end of the year. Digital disruption and the blurring of sector lines have automotive companies planning for multiple possible futures. M&A plays a critical role within these scenarios, as an important, transformative option for expanding on the core products and services of today, and accelerating emerging businesses of tomorrow. Automotive companies that successfully balance their M&A plans with strategic and innovative corporate initiatives will be well positioned to win in the evolving marketplace.
Executive summary While deal fundamentals were supportive of a healthy transactions market, automotive deal activity slowed during 1H16. Automotive companies maintained a cautious dealmaking approach, focusing on synergy savings generation and expansion of geographic footprint. 19% 6% y-o-y decline in deal values (US$27.6 billion) y-o-y decline in deal volumes (426 deals) 76% Share of deals with values up to US$100m The average deal size stood at US$138 million in 1H16 Sub-sector insights Regional insights Top target nations (volume) Top acquiring nations (volume) 42% Share of component suppliers in the deal values in 1H16 Source: Dealogic ~50% y-o-y increase in retail deal values US 20% China 16% UK 10% US 20% China 17% UK 9% Automotive transactions and trends 1H16 1
Executive summary With economic sentiment broadly supporting transactions, automotive companies appetite for M&A remained strong, despite decreased deal volumes. Deal completion scenario* in the last two years 91% Overall completion rate for deals announced in last nine quarters 79% Average deals closed in the announced quarter, during 2Q14 to 2Q16 99.6% 99.2% 97.6% 97.8% 96.9% 90.5% 84.8% 75.2% 73.8% 81.1% 86.7% 83.0% 82.1% 77.2% 80.6% 72.8% 77.0% 70.5% 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Deals completed (%) Deals completed in the same quarter (%) Continued confidence in the M&A market** 52% of automotive executives expect to pursue acquisitions in the next 12 months 49% of automotive executives expect the M&A market to improve in next 12 months, while an additional 49% expect a stable M&A market 57% of automotive executives have a positive level of confidence with regards to the number of acquisition opportunities *Based on deal volumes. ** Insights from the latest Capital Confidence Barometer. Source: Dealogic and Capital Confidence Barometer 2 Automotive transactions and trends 1H16
Analysis by deal sizes Low- to middle-market transactions, those valued up to US$250 million, continue to dominate the automotive M&A space. Deal volumes split by deal size, 1Q13 2Q16 Deal drivers 100% 90% 80% 70% 60% 50% 40% 30% 10% 7% 4% 7% 9% 8% 82% 86% 87% 9% 9% 83% 13% 8% 79% 9% 12% 2% 7% 89% 80% 8% 5% 87% 14% 10% 75% 10% 9% 11% 9% 15% 8% 15% 12% 16% 8% 82% 76% 77% 75% 77% Gain market share in existing geographical markets Reduce costs and improve margins Access new technologies and intellectual property Move into new geographical markets 20% 10% 0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Transaction values in US$ million <= 100 101 250 >250 *Calculation based on deals with disclosed values. Source: Dealogic Automotive transactions and trends 1H16 3
Cross-border deals in 1H16 Companies continue to focus their M&A activity around a core group of developed and top-tier emerging countries. 21% 4 deals 55% UK (44) 24% 3% Germany (32) 21% 1 deal 77% 7% Japan (30) 16% 63% US (106) 18% 19% 1 deal 1 deal 2 deals 76% 2 deals 70% China (83) 18% 12% 1 deal 7% 7% South Korea (14) 86% 3 deals Domestic deals Outbound deals Inbound deals *The number in brackets represent total numbers of deals in that country/region. Source: Dealogic Where a company operates is as important as the segments in which it operates. Enterprises that undertake a robust portfolio review often move toward geographies that fill gaps or are ripe for disruption. 4 Automotive transactions and trends 1H16
Cross-border deals in 1H16 Cross-border deals formed a significant share of high-value deals, driven by the improving investment climate. Key drivers for cross-border deals Deal values (in US$ million) <100 100 250 >250 19 6 15 15 116 33 Gradual easing of FDI and related regulatory processes Growing domestic demand for global products in emerging markets Access strategic proprietary assets and low labor cost Domestic Cross-border Deal type *The size of the circle and the number represents deal volumes for deals with disclosed values. Source: Dealogic Leverage cost base/ economies of scale With global growth moderating and uneven, cross-border M&A strategies are driven by companies seeking pockets of growth abroad. Steady cross-border acquisition activities highlight the increasing interconnectedness within the global economy. Automotive transactions and trends 1H16 5
Transaction drivers for the automotive value chain Restructuring of underperforming operations Optimizing costs and achieving operational efficiencies Accessing emergent technologies and innovation, such as self-driving cars and light-weighting Geographic diversification to manage regional demand volatility Expanding or rationalizing product portfolio to maximize return on capital Access to new customer segments, products and industrial solutions Vehicle manufacturers Suppliers Key M&A drivers in 1H16 Fleet and rental Retail and aftermarket Re-engineering operations and infrastructure, and making selective growth investments Securing private equity/activist investments for business expansion/restructuring Increasing investors confidence in tech-based mobility providers driven by the new collaboration economy Establishing distribution network in domestic markets Enhancing core business model and services Enabling integrated service offerings 6 Automotive transactions and trends 1H16
Vehicle manufacturers transactions Vehicle manufacturers Suppliers Key M&A drivers in 1H16 Fleet and rental Retail and aftermarket Innovation in the automotive sector is pushing M&A into a higher gear. During 1H16, deals were driven by business integrations aimed at capacity improvement, networks in emerging markets and technology advancement. Deal values increased by 70% y-o-y to US$9.2 billion Deal volumes decline by 9.5% y-o-y Japan and China were the largest acquirer countries with a combined 93% share in deal values M&A strategy outlook Deal value (US$m) No. of deals 14,868 Operational restructuring to unlock capital for expansion 17 969 35 21 674 18 1,654 26 307 21 21 27 32 23 15 1,491 3,901 1,903 2,269 6,010 3,191 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 *The Porsche-Scania deal contributed more than 60% to the total deal value during 1Q14. Source: Dealogic Deal indicators 84% Share of the top five deals in 1H16 in total deal values 57% Completion rate of deals announced in 1H16 based on deal volumes 50% China and US deal volume share in total deals Access to autonomous driving and connectivity technologies, and future mobility solutions/services Improving efficiency with complete integration of subsidiary businesses Automotive transactions and trends 1H16 7
Parts and equipment (supplier) transactions Vehicle manufacturers Suppliers Key M&A drivers in 1H16 Fleet and rental Retail and aftermarket 1H16 deals were driven by portfolio rationalization and expansion Deal values declined by 45% y-o-y to US$11.4 billion, while deal volumes declined by more than 17% y-o-y China, the US and Japan emerged as the largest acquirer countries with 64% share in deal values China, the US and Germany were the largest target nations, accounting for more than 60% share in deal values M&A strategy outlook Deal value (US$m) 16,600 112 111 89 84 No. of deals 15,255 111 100 100 88 82 94 80 Continued portfolio rationalization and expansion 7,771 8,917 6,976 7,158 4,609 5,695 5,182 4,319 1,606 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Scaling-up of global presence, monetization of nonstrategic business divisions Source: Dealogic Deal indicators 47% Share of the top five deals in 1H16 in total deal values 75% Completion rate of deals announced in 1H16 based on deal volumes 69% Completion rate of deals announced in 2Q16 based on deal volumes Gaining access to new safety and electronics technologies 8 Automotive transactions and trends 1H16
Retail and aftermarket transactions Vehicle manufacturers Suppliers Key M&A drivers in 1H16 Fleet and rental Retail and aftermarket 1H16 deals were driven by enabling integrated service offering and expansion of network Deal values increased by 50% y-o-y in 1H16, indicating rising level of mega deals being transacted; volumes declined by 17% y-o-y China, the US and France emerged as the largest acquirer nations with a share of 82% in deal values For 1H16 China was the largest target nation, accounting for nearly 56% share of deal values M&A strategy outlook Deal value (US$m) 68 68 71 86 No. of deals 80 65 62 18,109 77 60 86 57 Enabling integrated service offerings 1,623 1,102 848 933 2,171 798 1,109 2,998 1,747 2,707 Expansion of distribution networks 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Source: Dealogic Deal indicators 78% Share of the top five deals in 1H16 in total deal values 90% Completion rate of deals announced in 1H16 based on deal volumes 84% Completion rate of deals announced in 2Q16 based on deal volumes Expand presence in new geographies or related business lines Automotive transactions and trends 1H16 9
Fleet and rental transactions Vehicle manufacturers Suppliers Key M&A drivers in 1H16 Fleet and rental Retail and aftermarket 1H16 deal activity focused on operational improvement and business expansion, as well as growing confidence in the business model of tech-based mobility companies. Deal values declined by 46%, whereas deal volumes declined by 4% y-o-y, indicating a steep fall in the average deal values China, France and Hong Kong were the largest acquirer nations, contributing 73% share by deal value China, France and the US were the largest target nations, contributing 72% share by deal value M&A strategy outlook Deal value (US$m) No. of deals 61,523 Enabling integrated mobility products and services 37 43 38 41 37 28 30 27 27 25 28 348 1,071 294 709 4,275 456 2,276 2,324 2,275 243 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Product and services portfolio expansion for urban and business customers Source: Dealogic Deal indicators 83% Share of the top five deals in 1H16 in total deal values 79% Completion rate of deals announced in 1H16 based on deal volumes 75% Completion rate of deals announced in 2Q16 based on deal volumes PE investments for geographic expansion and improving operational efficiency 10 Automotive transactions and trends 1H16
Capital and M&A outlook Insights from the Automotive Capital Confidence Barometer Digital and innovation drive M&A market Global economic confidence challenged by regional political instabilities Technology, digital and changing customer preferences fuel cross-sector M&A M&A strategy focused on cross-border acquisitions Growth strategies focus on risk management and digital technologies and analytics 1 2 3 4 86% 31% 76% 53% Respondents view the economy as either stable or modestly improving Respondents cited access to new materials or technologies/ digitalization as drivers for acquisition outside of automotive sector Respondents planning acquisitions outside their immediate region Respondents focused on improving risk management to drive growth over next 12 months 33% 28% 24% 48% Respondents cited geopolitical instability as the greatest business risk Respondents cited changing customer behavior as a driver for acquisition outside of automotive sector Respondents planning domestic acquisitions in the next 12 months Respondents planning to make better use of digital technologies and analytics as growth drivers Note: Automotive Capital Confidence Barometer was a survey of 112 senior automotive executives from large companies around the world. Automotive transactions and trends 1H16 11
EY s Capital Agenda key considerations and implications Do you have the right capital structure to meet your strategic priorities? Integrate government incentives, direct loans and guarantees in capital-raising strategies Refinance debt, equity and other obligations Execute loan-to-own strategies providing opportunities to raise capital What is the best way for your company to grow and is it aligned to core business? Assess investment opportunities and risks associated with new segments and business models Use need-based and strategic alliances, JVs and acquisition to gain technology and geographic coverage Build flexibility in emerging market investments Raising Investing How can you improve the performance of your assets? Balance cost reduction with sustainable process change Preserving The Capital Agenda Optimizing What steps can you take to maximize your portfolio s performance? Improve information flows to support enhanced visibility of liquidity and cash risks Institutionalize and integrate working capital initiatives Divest carefully implement risk management process around divesture cycle to maximize cash benefits Benchmark leading-class performance and pursue targeted change Enhance business modeling and cash forecasting systems and capabilities Maintain a dynamic business and product portfolio assessment process to support liquidity needs Evaluate effectiveness of currency and raw material hedging strategies 12 Automotive transactions and trends 1H16
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