No One Wants Delphi, But There's a Lot Going On In The Auto Sector

Implications: A worldwide slow down in auto sales has not cooled the red-hot M&A climate in the automotive sector, and carmaking executives say there are more to come.

Analysis: The past year has seen some of the biggest-ticket merger and acquisition deals for years in the automotive sector, and carmaking executives and bankers say there are more to come.

Other than Tata Motors recent purchase of Jaguar and Land Rover from Ford, large-scale acquisitions like Daimler's 1998 purchase of Chrysler are currently out of fashion, many more tie-ups, decouplings, and asset sales by car companies are in the pipeline.

Rather than 1990s-style merger-mania, the current round of consolidation is being driven primarily by regulators' growing pressure on carmakers to build lower-emission, more fuel-efficient vehicles. This has profound implications for the type of cars and engines car companies need to develop.

Surging consumer demand in countries such as China is also prompting a quest by carmakers to forge new alliances, as well as the rise of a new set of emerging automakers, from India's Tata Motors to Russia's Autovaz.

The resulting shake-out  in the sector is rippling along the supply chain in both directions to parts suppliers and motor retailers, which are also in the throes of consolidation.

Among automotive suppliers, such as Delphi, further mergers and acquisitions are likely as leading suppliers in the U.S. and Europe seek to restore or build profitability. Some in private equity, which has been active in recent years, may sell.

"A lot of people are actively pursuing an exit, winding down the business, or available for a sale." Says Jeff Perkins, managing director at Close Brothers, which over the past five years has done over 50 buy, sell, advisory or restructuring deals in the sub-sector.

Another sub-sector likely to see more action is car retailing, where factory pressure to consolidate will intensify as lower demand for vehicles continues. In the UK the top 10 groups control only 15% of total market share. In the U.S. the top 125 dealer groups accounted for 17% of all vehicles sold in 2007.