American Axle & Manufacturing Holdings Inc.'s bold move last week to acquire Metaldyne Performance Group Inc. in a $3.3 billion deal is an operational win.
The merged companies will generate nearly $7 billion in revenue and reduce American Axle's reliance on its largest customer, General Motors. But at what cost?
Local experts say the deal is expensive and carries new financial risk, along with the addition of new, potentially challenging board room dynamics for the company led by the late Richard E. Dauch and then his son David since the company's inception in 1994.
Under terms of the deal, which is expected to close in the first half of next year, Detroit-based American Axle will pay $13.50 per share for Southfield-based MPG, with $1.6 billion in cash and stock, and assume $1.7 billion in MPG debt.
American Axle is paying a 50 percent premium for MPG, far higher than 30 percent average premium in other recent auto supplier deals, according to data compiled by Bloomberg.
The transaction will push American Axle's net debt from 1.6 times earnings before interest, tax, depreciation and amortization to 3.5 times.
The deal announcement last week occurred a day after U.S. automakers reported weaker October vehicle sales even after offering deeply discounted prices. And analysts are projecting a flat year in car sales, yet still above levels seen before the Great Recession. However, the automotive industry is cyclical and American Axle bought at the peak, with another recession looming in the years to come, said David Sowerby, vice president and portfolio manager at Loomis, Sayles & Co. in suburban Detroit.
"The debt load is going to put pressure on the firm," Sowerby said. "While Axle has been a great operator, they are adding debt in the bottom of the seventh inning of the automotive cycle. We're going to see a downturn in the cycle, and it will test their operating abilities."
Dependence on GM
But the transaction does solve one of American Axle's biggest longstanding issues: its reliance on its former parent, GM.
GM now accounts for about 66 percent of the company's revenue. The integration of MPG will reduce GM to 41 percent of sales with plans to reduce that further to 32 percent by 2020.
Some of that reduction comes from a loss of business with GM.On Nov. 3, the company confirmed it will no longer be the sole supplier of axles and driveshafts for GM's next-generation full-sized pickups and SUVs.
When GM redesigns those trucks in 2018, American Axle will supply 65 percent of the axles. A GM spokesman declined to comment on rumors that the automaker will produce the rest in-house.
The MPG acquisition will take some of the sting out of GM's decision, which was made before the deal was announced. Nevertheless, GM's axle business is a big-ticket contract.
Last year, GM's truck axles generated $1.91 billion, 49 percent of American Axle's total sales of $3.90 billion, according to the company's presentation to investors last week.
Ever since it was spun off by GM in 1993, American Axle has sought to diversify its customer portfolio -- with mixed success.
As of last year, GM's share of American Axle sales totaled $2.57 billion.
Ford business
Ford Motor Co., which previously had done little business with American Axle, will become its third-biggest customer after GM and FCA US LLC, thanks to the MPG acquisition.
"We'll have tremendous business with Ford," Dauch told Automotive News in a Nov. 3 phone interview, "and we'll start getting a good balance of other customers."
Dauch said American Axle is lining up new contracts with other customers to replace 90 percent of its lost GM axle revenue by 2020.
American Axle is expanding out of its truck niche to produce components for crossovers. Dauch said he has signed up new customers for American Axle's EcoTrac all-wheel-drive system, which debuted on the Jeep Cherokee.
"We've got multiple customers in multiple regions," Dauch said. "We'll be launching programs in 2018 through 2020."
