Automotive transactions and trends Global automotive mergers and acquisitions review CY2014 Enter
Executive summary Automotive sector witnessed record deal activity in 2014, with continued growth in the developed markets and the need to penetrate emerging markets 2014 deal activity highlights 2.5x 10% y-o-y growth in deal values (US$66.1 billion) y-o-y increase in deal volumes (947 deals) Steep rise in average deal size to US$188 million in 2014 Sub-sector insights Regional insights >50% Share of component suppliers in the deal values in 2014 3.5x y-o-y growth in fleet and rental deal values in 2014 Top target nations US 50% China 15% Sweden 14% Top acquiring nations Germany 37% US 19% China 15% Middle-market transactions and improving investor confidence to drive M&A momentum Capital optimism in the automotive sector has never been higher. Acquisitive appetite has increased with cash-rich balance sheets, combined with easier access to debt financing opportunities. Low- to middle-market transactions, those valued up to US$250 million, will comprise the bulk of deals in the sector. The majority of acquisitive companies are now focusing on M&A to strengthen their core business, with an eye to boosting market share, managing costs and improving margin growth. The need for new market strategies coupled with increasing the mix of new products and services, are key criteria for selecting the most suitable partners for business sustainability. Mark Short Global Automotive and Transportation Industry Leader, Transaction Advisory Services 2 Automotive transactions and trends CY2014
Strong confidence in the likelihood of deals closing, and in the number and quality of acquisition opportunities Deal completion scenario in the last two years* 94% Overall completion rate for deals announced in the last eight quarters 83% Deals closed in the announced quarter, average during 2013 14 Deals completed (%) Deals completed in the same quarter (%) 100% 99% 100% 99% 97% 93% 90% 90% 85% 83% 84% 83% 80% 79% 79% 80% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Growing confidence in the M&A market** 65% Confidence in number of acquisition opportunities (up from 57% in Oct. 2013) 59% Confidence in quality of acquisition opportunities (up from 38% in Oct. 2013) 54% Confidence in likelihood of deals closing (up from 36% in Oct. 2013) * Based on deal volumes. ** Insights from the 10th edition of EY s Automotive Capital Confidence Barometer. and Capital Confidence Barometer Automotive transactions and trends CY2014 3
Cross-border deals scenario in 2014 Automotive companies focused on establishing a global footprint to achieve competitive advantage 8 deals 72% UK (65) 23% 5% 49% Germany (76) 29% 83% 12% 5% Russia (58) 79% US (231) 9% 12% 3 deals 2 deals 22% 4 deals 2 deals 73% 14% China (154) 13% 63% 4% Japan (80) 3 deals 33% 4 deals Domestic deals Outbound deals Inbound deals *The number in brackets represent total numbers of deals in that country/region. 4 Automotive transactions and trends CY2014
Low- to middle-market transactions, those valued up to US$250 million continue to dominate the automotive M&A space Deal volumes split by deal size, 2013 14 100% 8% 90% 8% 80% 70% 60% 50% 40% 84% 30% 20% 10% 0% 2013 11% 6% 83% 2014 Deal drivers Consolidation and complete integration to leverage synergies Cross-border market access Access to new products, geographies and technologies Diversification to niche segments Deal values (in US$ millions) <= 100 101 250 >250 *Calculation based on deals with disclosed values. Cross-border deals form a significant share of high-value deals driven by improving investment climate Key drivers for cross-border deals Deal values (in US$ millions) <= 100 >100 <=250 >250 25 16 15 6 236 54 Domestic Cross-border Deal type Favorable investment and taxation policies Growing domestic demand in emerging markets for global products Gradual easing of foreign direct investment and related regulatory processes Low labor and material cost *The size of the circle and the number represents deal volumes for deals with disclosed values. Automotive transactions and trends CY2014 5
Transaction drivers for the automotive value chain Click each segment to know more Restructuring of loss-making operations Equity ownership to realize completed synergies from joint operations Driving innovation by securing technology and talent Reengineering of operations and infrastructure and making selective growth investments PE/activist investments for business expansion/restructuring Increasing investor confidence in tech-based mobility providers driven by the new collaboration economy Geographic diversification to manage regional demand volatility PE exits at substantial profits and secondary buyouts based on strong growth outlook Access to new customer segments, products and industrial solutions Expanding reach; network in emerging markets PE investments to enable digital marketing and connectivity solutions Presence in multiple markets; brands to benefit from economies of scale 6 Automotive transactions and trends CY2014
Transaction trends and drivers: vehicle manufacturers Key M&A drivers in 2015 2014 deals were driven by big-ticket business integrations in Europe, the US and China aiming at improving operational efficiency and leveraging synergy benefits Deal values grew 2.5x y-o-y to US$17.9 billion Deal volumes rose by 16% y-o-y, indicating an increase in average deal size Germany, Italy and China were the largest acquirer countries with an 84% share in deal values M&A strategy outlook Deal value (US$m) 28 26 3,615 16 Number of deals 14,868 34 17 22 18 27 Expansion of geographic footprint with a focus on leveraging growing demand in emerging markets 1,705 934 969 1,220 1,652 208 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Access to alternate powertrain and connectivity technologies Deal indicators 86% Completion percentage of deals announced in 2014 based on deal volumes 85% Share of top four deals in total deal values in 2014 Operational restructuring to unlock capital for expansion Automotive transactions and trends CY2014 7
Transaction trends and drivers: parts and equipment suppliers Key M&A drivers in 2015 2014 deals were driven by consolidation to create big conglomerates, aiming at economies of scale and portfolio/geographic expansion Deal values grew 2.5x y-o-y to US$34.6 billion and deal volumes rose by 17.1% y-o-y Germany, the US and the UK emerged as the largest acquirer countries with an 82% share in deal values The US and Germany were the largest target nations, accounting for an 83% share in deal values M&A strategy outlook Deal value (US$m) Number of deals 85 93 83 83 112 86 110 16,596 95 Access to safety, infotainment and connectivity technologies 7,736 8,862 4,227 4,609 2,093 2,958 1,367 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Establishing local supplier network in emerging markets Deal indicators 87% 73% Completion percentage of deals announced in 2014 based on deal volumes Share of domestic deals in total deal volumes Product portfolio expansion or rationalization to maximize return on capital 8 Automotive transactions and trends CY2014
Transaction trends and drivers: retail and aftermarket Key M&A drivers in 2015 2014 deals were driven by the need for network expansion in emerging markets and enablement of digital marketing Deal values increased by 69% y-o-y in 2014 and volumes rose by 7.8%, indicating a sharp rise in average deal size China, Hong Kong and the US emerged as the largest acquirer nations with an 84% share in deal values China was the largest target nation, accounting for close to 73% in deal values M&A strategy outlook Deal value (US$m) 68 72 73 Number of deals 68 69 70 87 4,943 Distribution network in lower tier cities in emerging markets 77 1,656 1,623 973 1,152 848 931 407 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Digital marketing and data analytics to drive customer engagement Deal indicators 94% Completion percent of deals announced in 2014 based on deal volumes 82% Share of the Asia-Pacific region in total deal values in 2014 Enabling integrated ownership, insurance and maintenance packages Automotive transactions and trends CY2014 9
Transaction trends and drivers: fleet and rental Key M&A drivers in 2015 2014 deal activity was driven by PE investments for operations improvement and business expansion and also growing confidence in the business model of tech-based mobility companies Deal values grew 3.5x; however, deal volumes declined by 5% y-o-y, indicating a steep increase in the average deal values The US and the UK were the largest target nations, contributing close to 74% in Canada, the US, deal values Singapore and China were the largest acquirer nations with an 79% share in deal values M&A strategy outlook Deal value (US$m) 40 33 39 Number of deals 37 28 45 1,944 33 34 Enabling integrated mobility products and services 716 305 216 348 1,402 1,352 915 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Products and services portfolio expansion for urban and business customers Deal indicators 89% 87% Share of domestic deals in 2014 by deal volumes Completion percentage of deals announced in 2014 by deal value PE investments for geographic expansion and improving operational efficiency 10 Automotive transactions and trends CY2014
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 Raising Investing 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 acquisitions to gain technology and geographic coverage Build flexibility in emerging market investments How can you improve the performance of your assets? Balance cost reduction with sustainable process change 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 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 Enhance business modelling 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 Automotive transactions and trends CY2014 11
For a conversation about your capital strategy, please contact us: Randall Miller Global Automotive and Transportation Industry Leader +1 313 628 8642 randall.miller@ey.com Mark Short Global Automotive and Transportation Industry Leader, Transaction Advisory Services +1 313 628 8760 mark.short@ey.com Tony Tsang Far East and Oceania Automotive Industry Leader, Transaction Advisory Services +86 21 2228 2358 tony.tsang@cn.ey.com Peter Wesp Partner, Transaction Advisory Services +49 6196 996 27282 peter.wesp@jp.ey.com EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. 2015 EYGM Limited. All Rights Reserved. EYG no. ED0134 BMC Agency BACS 1002123 ED None. Jim Carter Americas Automotive and Transportation Industry Leader, Transaction Advisory Services +1 313 628 8690 jim.carter@ey.com Stephan Hellmann Partner, Transaction Advisory Services +49 6196 996 25030 stephan.hellmann@de.ey.com Anil Valsan Global Automotive and Transportation Lead Analyst +44 20 7951 6879 avalsan@uk.ey.com Regan Grant Global Automotive and Transportation Marketing Leader +1 313 628 8974 regan.grant@ey.com In line with EY s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/automotive Acknowledgements Special thanks to EY Knowledge automotive analysts Abhishek Gupta and Bhaskar Mazumdar for the analysis and compilation of this study.