ock Mthat few investors were expecting. Although shares of Delphi shot up by over 50% in response to the news, BorgWarner shareholders weren’t as impressed, as shares of the company ended up falling a little instead.
BorgWarner, which produces technology and parts for both regular combustion as well as hybrid/electric vehicles, offered a generous premium to Delphi shareholders in order to sweeten the deal. The auto supplier will end up owning 84% of the combined entity, while Delphi shareholders will hold the remaining 16%.
However, there are some reasons as to why investors weren’t happy about this, at least for BorgWarner. For one, the company is offering a hefty premium to buy out Delphi, a price tag that many investors think might be too much. The offer comes in the form of an all-stock transaction that would give a fixed exchange ratio of 0.45 BorgWarner shares per Delphi stock, which works out to a 75% premium.
Another reason why BorgWarner’s stock fell a little in light of the news could be the weakening auto market around the world. China, which is the world’s largest new car market, has seen auto sales decline by 8% in the past year. While the Chinese government is making a push towards electric and hybrid vehicles, as are countries in Europe, the Delphi acquisition doesn’t add much in this regard. Instead, Delphi primarily produces parts for gas-powered cars.
“We have mixed feelings on this. For BorgWarner shareholders, we understand a view that this doesn’t reduce exposure to internal combustion engines,” wrote Baird analyst David Leiker in a research report on Tuesday following the news. While he remains conflicted, management is a bit more optimistic about where it’s going with the acquisition, saying instead that the company is well on track to diversify its overall business. “By 2023, we estimate the breakdown of pro forma BorgWarner will be 63% in combustion, 29% in hybrid and 8% in electric. This 8% in electric would represent a 30% increase in BorgWarner’s stand alone exposure to the electric market,” said Borg CEO Frederic Lissalde on the company’s conference call on Tuesday.
Prior to this announcement, both stocks had been having a pretty bad year. Delphi had lost over 40% of its market value over the course of 2019, while BorgWarner lost closer to 10% of that same period. While the acquisition announcement was great news for Delphi, which has since gained back all of its previous 2019 losses, time will tell whether or not this move will be good for BorgWarner.
Delphi Technologies Company Profile
Delphi Technologies’ main products are fuel injection and valvetrain systems along with the sensors and software controls for each, representing approximately 60% of 2018 total revenue. With a diverse base of vehicle manufacturer customers, no automaker represented 10% or more of the company’s 2018 revenue. Regionally, this global parts supplier had about 44% of 2018 revenue from Europe, Middle East, and Africa, 28% from North America, 25% from Asia-Pacific, and 3% from South America. – Warrior Trading News
