BorgWarner Inc.│ Discussion Materials │ April 29, 2022
Table of Contents I. Executive Summary............................................ 3 II. Company Backgrounds................................. 4-7 III. Industry Overview…………………............. 8 IV. Strategic Recommendation............................... 9 V. Synergies/Risks................................................... 10 VI. Strategic Alternatives.................................... 11 VII. Valuation…………………………………. 12-16 VIII.Appendix............................................................ 17-22
•
Operates through three primary segments: Air Management & Turbochargers, E Propulsion & Drivetrain, and Fuel Injection
•
•
The industry is moving to EVs, but much slower than most realize
Executive Summary Overview
Industry RecommendationAssessmentCompanyAnalysis Executive Summary │ 3 •
Low cost of debt at 3.3% with room for leverage in its capital structure
According to its investor presentations, BorgWarner is seeking to grow its aftermarket presence
•
•
However, it also has a significant amount of cash on hand with over $1.8 billion
While opportunities in the OEM space are currently very promising, BorgWarner has little room to grow as it is already one of the largest OEM suppliers On the other hand, the aftermarket space also looks promising
•
•
BorgWarner is advised to purchase Standard Motor Products at a price of $61.69 per share due to strong fundamentals and current market undervaluation as a path to grow its aftermarket presence
BorgWarner is a manufacturer of automotive components sold primarily to OEMs
•
The company has 96 manufacturing facilities in 24 countries, employing roughly 50,000 people
For many years, there will be a very large market for traditional ICE aftermarket products
•
Company Background - BorgWarner Company Background │ 4 Company Description • Headquarters: Auburn Hills, MI • Industry: Auto Parts and Equipment • Supplies a variety of mechanical components for ICE, hybrid, and electric vehicles • Serves both automotive OEMs and aftermarket customers • Primarily OEMs (currently 95% of sales) • Seeking to grow it’s aftermarket presence (currently 5% of sales) Geographic Locations • 96 manufacturing facilities in 24 countries, ~50,000 employees • 32 located in the United States • 29 located in Europe • 35 located in Asia RevenueDescriptionsBreakdown • Air Management & Turbochargers: turbochargers, eTurbos, timing systems, emissions systems, thermal systems, ignition systems, powertrain sensors • E-Propulsion & Drivetrain: rotating electrical components, power electronics, control modules, transmissions, torque management systems • Fuel Injection: gasoline fuel injection components and systems
Company Background │ 5 Financial Summary ($ in millions, except per share items) Total Revenue: 7,556 Adj. EBITDA: 1,333 EBIT: 860 Net Income: 414 EPS: 2.17 Market Capitalization: 17,330 Total Enterprise Value: 21,190 Current Ratio: 1.2x Trailing P/E: 16.8x Total Debt: 4,522 Key Customers $BWA 1 Year Performance Company Background - BorgWarner
Company Background – Standard Motor Products Company Background │ 6 Company Description Revenue Breakdown Geographic Locations • 25 manufacturing facilities in 9 countries, ~5,000 employees • 16 located in North America • 4 located in Europe • 5 located in Asia Descriptions • Ignition, Emission, and Fuel System: ignition control modules and sensors, exhaust systems, mass airflow sensors, fuel pressure sensors, electronic throttle bodies and fuel injectors • Wire & Cable: ignition wiring, various electrical system wiring • Temperature Control: radiator and engine cooling systems, clutch assemblies, A/C compressors, oil coolers • Headquarters: Auburn Hills, MI • Industry: Auto Parts and Equipment • Supplies aftermarket replacement products for many types of vehicles, including ICEs, hybrids, and EVs • Leader in aftermarket replacement products since 1919 • Aftermarket: 81% of sales • OEM/non aftermarket: 19% of sales
Company Background │ 7 Financial Summary ($ in millions, except per share items) Brands Total Revenue: 1,299 Adj. EBITDA: 156 EBIT: 129 Net Income: 91 EPS: 4.39 Market Capitalization: 961 Enterprise Value: 1,120 Current Ratio: 1.5x Trailing P/E: 9.52x Total Debt: 170 Key Customers $SMP 1 Year Performance Company Background – Standard Motor Products
Industry Overview Industry Overview│ 8 Trends Outlook BorgWarner: Automotive OEMs Standard Motor Products: Automotive Aftermarket • Anticipated to grow at a CAGR of 2.8% through 2026 • Partially rebounding from pandemic related troubles, the industry grew 12% in 2021 • Fuel efficiency • CAFE requirements urging automakers to achieve at least 54.5 mpg by 2025 for new cars • Forced induction technology (turbochargers, superchargers) • Hybrid/EV technology • More vehicles on the road • Annual miles driven is rising • Average age of cars increasing • 11.3 years in 2013, 12.1 years in 2021 • EVs are not taking over as fast as most believe • Bloomberg expects EVs to total 8% of global passenger vehicles in 2030 • Anticipated to grow at a CAGR of 1.0% through 2026 • Grew 10% in 2021
Strategic Recommendation Strategic Recommendation│ 9 • BorgWarner purchase Standard Motor Products at a price of $61.69 per share • Total transaction value will be approx. $1.547 billion • This will be financed through debt for several reasons: • Room for leverage: capital structure is currently 70.5% equity and 29.5% debt • Low cost of debt: 3.3% after tax, BBB+ credit rating • Post acquisition capital structure: 65.84% equity and 34.16% debt Financial Summary ($ in millions, except per share items) • Implied Enterprise Value: 1,547 • Implied Equity Value: 1,388 • Implied Share Price: $61.69 • Current Share Price: $41.78 • Premium: 47.65% • Current EV/EBITDA: 7.1x • Implied EV/EBITDA: 9.9x • Derived from median precedent transactions multiple Rationale • The primary objective of this acquisition is to grow BorgWarner’s aftermarket presence • Very attractive at its current valuation despite conservative growth assumptions • Products will integrate well with BorgWarner’s current offerings • Low risk due to Standard Motor Products’ stability BorgWarner Current Cap. Structure
Revenue Synergies
•
BorgWarner will gain immediate access to Standard Motor Products’ 100+ year old distribution network, including nearly every major auto parts retailer
•
Synergies/Risks Synergies/Risks│ 10 Cost Synergies • Significant cost synergies due to the similarity of product offerings between BorgWarner and Standard Motor Products • Economies of scale: BorgWarner can likely move many of Standard Motor Products’ facility operations to its own existing plants, thus reducing fixed costs •
Risks •
•
BorgWarner can begin selling its own products through these retailers, increasing its aftermarket presence
•
While this presents a strong opportunity for synergies, it also poses the threat of cannibalism in sales
The main risk is product cannibalism BorgWarner and Standard Motor Products manufacture many of the same products
One way this can be avoided is by selling traditional BorgWarner products exclusively to OEMs, while selling Standard Motor Products components exclusively to the aftermarket
Strategic Alternatives Strategic Alternatives│ 11 #1: Acquire Garrett Motion Inc. • Turbocharger manufacturer located in Switzerland • $439 million market cap • Strong vertical integration opportunities • Risk: Trading very cheap due to a Chapter 11 filing in 2020, mostly resulting from issues following its separation from Honeywell. As of now, its current ratio is 1.1x. • Manufacturer of aftermarket automotive parts • $295 million market cap • Overall extremely similar to Standard Motor Products • Strong choice for a similar but smaller acquisition, however it is slightly more expensive on a multiple basis • 8.55x EV/EBITDA, compared to 7.05x for Standard Motor Products • Chinese manufacturer of automotive oil, water, and gas heat exchange products • $953 million market cap • Products are very similar to those offered by both Standard Motor Products and BorgWarner • Solid opportunity to increase exposure in Asian markets, but more expensive than Standard Motor Products • 10.91x EV/EBITDA, compared to 7.05x for Standard Motor Products #2: Acquire Motorcar Parts of #3:AmericaAcquire Zhejiang Yinlun Machinery Co
Football Field Valuation Summary Valuation│ 12 $48 $58 $49 $40 $65 $65 $51 $55 $35 $40 $70$65$60$55$50$45 Comps Precedents DCF 52 wk hi/lo Standard Motor Products, Inc. Range of Implied Share Prices
Comparable Company Analysis Valuation│ 13
Precedent Transaction Analysis Valuation│ 14
DCF – Projections and WACC Valuation│ 15
DCF – EMM, PGM, and Sensitivity Analysis Valuation│ 16
Appendix Appendix│ 17 Operating Model (1) Operating Model (2) Operating Model (3) Discounted Cash Flow Analysis How was revenue projected? What sources were used?
Operating Model (1) Appendix│ 18
Operating Model (2) Appendix│ 19
Operating Model (3) Appendix│ 20
How was revenue projected? Appendix│ 21
Revenue was projected based on IBISWorld estimates for the growth of the automotive aftermarket industry through 2025. This is a conservative approach. However, Standard Motor Products is a very mature company and is not likely to grow much differently from the overall industry.
What sources were used? Appendix│ 22 Company filings, Bloomberg Terminal, S&P Capital IQ, and IBISWorld