Automotive M&A is in top gear

Deal activity in the auto industry has never been higher, as manufacturers look to capitalize on the shift towards electric vehicles

After falling 15% to 73.8 million vehicles sold globally last year, car sales are projected to tick back up to 75.8 million units in 2021, according to automotive research and analysis company IHS Markit. Economies are on the road to recovery, and the turnaround in car sales has been driven in no small part by a solid rebound in demand from Chinese consumers.

Not surprisingly, things are looking up in the automotive M&A world, too. Mergermarket data shows that US$123.5 billion in auto deals changed hands globally in the first nine months of the year, already far surpassing any full-year on Mergermarket record (since 2006).

Electric growth 

The previous highest-value year for automotive sector M&A was 2009, with US$71.1 billion worth of deals. At that time, the sector was reeling from the shock of the global financial crisis. Chrysler had filed for chapter 11 bankruptcy reorganization, and was propped up by Fiat and the US and Canadian governments in a US$10 billion-plus rescue deal.

This time, however, the motivation for deals is very different. Carmakers are trying to catch up with Tesla, a first-mover in the rapidly growing electric vehicles (EV) space and the highest market cap auto company in the world.

EV sales are at the beginning of an expected megatrend. Even in the face of the pandemic, the International Energy Agency estimates that the EV market grew by 40% globally in 2020, with a record three million new EVs registered. By the end of the year, more than 10 million electric vehicles were on the road, or 1% of total vehicle stock. The forecast calls for EV sales of 145 million vehicles by 2030.

SPACs step in

The largest automotive transaction in the first three quarters of 2021 involved the special purpose acquisition company (SPAC) Churchill Capital Corp IV paying US$28.5 billion for the Californian EV maker Lucid. The second-largest deal saw Gores Guggenheim, another SPAC, purchase Swedish EV manufacturer Polestar Performance, formed by Volvo in 2017, for US$20 billion.

These examples follow a string of recent auto SPACs, including the likes of Fisker and Lordstown Motors. An uptick in late-2020 Automotive M&A was largely driven by SPAC transactions, such as SPAC Graf Industrial Corp.’s US$1.8 billion business combination with Velodyne Lidar, REE Automotive’s merger with SPAC 10x Capital Venture Acquisition Corp. for a US$3.1 billion enterprise value, the US$2.5 billion merger between luxury EV developer Faraday & Future and Property Solutions Acquisition Corp. and Decarbonization Plus Acquisition Corporation’s US$2 billion acquisition of Hyzon Motors.

Blank check companies are ideally suited to the EV investment thesis. Many EV companies are in the earliest stages of development, and most have yet to reach the profit stage. SPACs are a good fit for these early-stage companies that present a high-risk, high-reward opportunity to investors.

Coinciding with the EV company deals are deals touching on the autonomous driving trend. In Germany, Faurecia's US$8.4 billion acquisition of Hella in August created a top 10 global automotive supplier. Hella manufactures power and battery electronics, as well as radar sensors for advanced driver assistance systems. The French buyer said the combined company will be better placed to sell electric mobility and automated driving products to the industry.

Hella has been active in the M&A market itself, having divested its front camera software business to Volkswagen in September of last year for an estimated US$117 million, as part of its product portfolio management.

Distress indicators 

The auto sector is in a period of mass reinvention, with carmakers scrambling to seize upon the vast growth of EVs and autonomy. But shorter term, serious challenges have befallen the sector.

This year has been marred by extensive supply chain disruptions and rates of inflation not seen for decades. Commodity prices have been spiraling, the price of copper rising to a record high in May before easing off slightly. Costs remain excessive, and the pandemic has served to skew supply and demand as consumers have returned to showrooms. The ongoing semiconductor shortage has been particularly punishing for the automotive sector, costing the industry as much as US$100 billion in lost revenue.

These headwinds are likely to deliver transactions for the right buyers, whether distressed investors or opportunistic strategics.

In September, New York special situations firm Turnspire Capital Partners bought Canadian parts supplier Spectra Premium Industries in a rescue deal. In July, German turnaround firm Restart acquired Bo Parts, a specialist in small-batch spare parts manufacturing.

Deals involving troubled suppliers have been few and far between so far. To date, there have been only eight bankruptcy automotive deals in 2021, according to Dealogic data. This is slightly down on prior years, although the pandemic has been an exceptional case, given the abundant government support that has been extended to businesses.

The June emergence from bankruptcy of Hertz Global Holdings following its successful financial restructuring is another bright spot in the current climate. The rental car company filed for chapter 11 protection in May 2020 in response to the impact of the COVID-19 pandemic on its business.

Depending on how long the current supply chain chaos continues, there is potential for more distressed deal flow to follow. Just don't bet on it keeping pace with the EV M&A space.

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