Breakingviews: Car-parts makers seek solace in climate-driven M&A

BorgWarner and Delphi Technologies are saying something about the future of cars. The two car-parts makers on Tuesday unveiled a merger that values the latter at $1.5 billion and helps boost each side’s green-engine offerings. There was a similar logic to last month’s announced tie-up of Fiat Chrysler and Peugeot parent PSA. Mergers will become an increasingly important tool for companies trying to cope with, or take advantage of, the effect global warming will have on their business. Tuesday’s deal, though, comes packed with short- and medium-term challenges.

First, BorgWarner Chief Executive Frederic Lissalde is taking on a business that has been struggling since the split of the former Delphi Automotive into two companies at the end of 2017. Delphi Technologies’ stock had plummeted more than 80% in two years by close of business on Monday, hit by everything from slowing car sales to a big drop in its diesel business. Those trends affected others in the industry far less: Its new owner fell just under a third. Meanwhile shares in Aptiv, the other, larger part of the old Delphi that focuses on connected and autonomous vehicles, are roughly flat.

Second, there’s the price. BorgWarner is stumping up a 77% premium for Delphi. Projected cost cuts worth almost $1 billion after being taxed and capitalized would more than cover that – and the buyer’s shareholders get by far the lion’s share. But even allowing for that, BorgWarner would still be forking over a punchy 5.2 times adjusted EBITDA, the company estimates.

Moreover, Lissalde needs to prove that M&A-driven expense reductions are in addition to those each side had previously targeted. Without them, his operating margin is set to drop by 2 percentage points to 10%, according to the company’s presentation to investors.

Third, while Lissalde expects the deal to boost by a third the portion of BorgWarner’s sales that come from electric vehicles, it’ll only be 8%, in line with the overall market. That would hardly be disastrous, of course. But the Fiat Chrysler-PSA deal at least held out the prospect of the former avoiding European emissions fines in short order. BorgWarner and Delphi shareholders will have to take solace in supporting the climate-driven deal, even though it may take far longer to pay off.

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