On the 14th of August, Faurecia, a French-based automotive equipment supplier launched a tender for the acquisition of Hella, a German supplier specialized in the production of lighting and electronics automotive products in a €6.8bn deal. This combination is aimed at creating the 7th largest automotive supplier, well-positioned for new challenges such as electric mobility, autonomous driving, and cockpit of the future.
Faurecia SE is a France-based automotive equipment supplier and a global leader with a far-reaching impact in the industry, given the firm’s presence in 35 countries as well as 266 industrial facilities and 46 R&D centers. Faurecia was formed in 1997 with the takeover of Bertrand Faure by PSA-owned ECIA to create an international player. After the PSA-FCA megamerger, Exor group is the major shareholder of the company, which is currently listed on the Euronext Paris Stock Exchange, followed by the Peugeot family and Bpifrance.
The firm reports its activities into four main segments:
- Seating: development of seat systems that optimize the comfort and safety of users.
- Interiors segment: interior systems and advanced integrated cockpits.
- Clarion Electronics: production of in-vehicle infotainment, driver assistance software, and connectivity & cloud services as well as Clean Mobility, which develops technologies for Sustainable Mobility.
The company is massively investing to provide innovative equipment in the areas of energy recovery, air quality, biomaterials, connectivity, safety, and lightweight technologies, with R&D equal to €1.187bn in FY 2020, accounting for 8.1% of its revenue.
Faurecia generated around €14.7bn in sales in 2020, declining from 2019 figures due to the Covid-19 outbreak that heavily impacted the automotive sector. The company’s largest customers as a percentage of revenues are prestigious carmakers such as Volkswagen, Renault, Stellantis, General Motors, and Toyota. From a geographical perspective, Europe accounted for 48% of 2020 revenues, followed by North America at 25%, China at 18%, and other regions at 9%. Despite the adverse impacts of lockdowns on sales in 2020, Faurecia is poised for significant growth in the future, and a higher EBITDA margin in H1 2021 (14.2%) with respect to 2019 levels is the demonstration of the strong operating leverage and cash generation, with the firm on track to reach the targeted €26bn order intake in FY 2021.
The company, which has a market capitalization of €6.41bn, having a broad and diversified exposure to leading international OEMs, may soon face difficulties due to the current semiconductor shortage, which is constraining global vehicle production and Faurecia’s revenues and earnings, especially at the Clarion business group. The effect could be compounded by further supply-chain bottlenecks, resulting in an increase of inventories of critical parts, limiting working-capital improvement.
Hella KGaA Hueck & Co. (“Hella”) is a German-based automotive supplier specializing in lighting systems and vehicle electronics. In 1899, it was founded in Lippstadt (North Rhine-Westphalia) to produce ball horns and candle lights for carriages. Hella has mostly grown organically in the past decade (with the notable exception of the acquisition of FWB, a supplier of plastic materials) and remains a family-controlled company. Before the offer of Faurecia, the Hueck family owned a 60% stake in Hella.
Today, it operates in 35 countries around the world with over 35,000 employees. In 2020-2021, it had total sales of €6.5bn and a market capitalization of $6.69 (post public offering by Faurecia). In the past few years, the share price of Hella lagged behind the performance of the Dax (the main German market index). Its share price peaked in 2018 at €59, a price that was only reached again recently after the offer by Faurecia.
Its activities are reported into 3 main segments:
- Automotive (€5.5bn – 87% of sales): It is split into the Lighting and Electronics business. The lighting business develops lamps both for the interior and the exterior body of the car. In recent years, Hella has mobilized important R&D resources to improve its lighting offering with adaptive lamps that can adapt the direction and the brightness of the lamps to real-time driving conditions. The Electronics business comprises solutions for driving assistance, energy management, body electronics, power steering, and more importantly, lighting electronics.
- Aftermarket (€500m – 8% of sales): This segment offers spare part retailers and independent workshops a selection of 38,000 spare parts. In addition, it offers equipment for its clients such as exhaust gas testing, lighting adjustments, calibration, and measuring.
- Special Applications (€350m – 6% of sales): It develops lighting and electronic product for special vehicles such as construction, agricultural vehicles, buses as well as products for the marine sector.
On the geographical level, Hella remains a European-focused automotive supplier with 61% of its sales reported in Europe. The remainder is split equally between the Asia-Pacific region and the American continent. Hella’s strategy is to invest an important percentage of its sales into R&D (10%). As such, it wants to position itself to segments that it thinks will emerge in the future. For example, it is developing what it calls “sophisticated lighting technologies”, a term that encompasses lighting equipment with greater design freedom, that can be software controlled, and that has higher energy efficiency.
It was also the first manufacturer to develop “matrix headlamps” which are lamps consisting of a cluster of LEDs rather than a single high-beam unit. It is now developing a new generation of headlamps called “Digital Light SSL | HD” with around 16,000 pixels per light source. Regarding interior lighting, its focus is now to create lighting sources that are not only for aesthetic purposes but that will be part of the driving experience (to illustrate, it might be possible to turn lights red when danger is detected by the car’s sensors).
Faurecia and Hella are active in the automotive supplies industry and their transaction is a vivid example of the industry’s M&A activities happening in the past. Over the past 10 years, there was strong momentum in the M&A market, with more suppliers venturing into new business and technology domains adjacent to their traditional core business. This is mainly rooted in the fact that in recent years the industry shifted towards key technologies such as electric vehicles or gave rise to connected technologies. These innovations have heavily disrupted traditional supply chains. Many automotive suppliers had to compensate for the eroding revenues in their traditional core business and were pressured to find new business sources. This trend was further fueled by the pandemic and spilled over, causing a downturn in the automotive market, too.
Before the pandemic, there were four forces impacting the industry: shared mobility, volume headwinds, vehicle content disruption, and traditional value chain disruption. In 2021, shared mobility in the supply chain will be removed from the list and new forces come to work, such as COVID-19, the emergence of telecommuting and its impact on suppliers and the workforce, and the destruction of urban centers, that are likely to slow shared mobility over the next five years. In particular, the semiconductor crisis continues to be a major concern for stakeholders throughout the supply chain. Several US manufacturers have recently been forced to close vehicle assembly plants due to chip shortages. Supply problems also extend to other raw materials needed for electric car battery production, including lithium, nickel, and cobalt.
In terms of industry growth, it is not surprising that electrified vehicles (EVs) are set to grow strongly, while the parts that EVs make superfluous, such as exhaust systems, transmissions, and everything else that supports the propulsion of an internal combustion engine, are expected to decline, or stagnate. This is demonstrated by a recent analysis of nearly 300 of the world’s leading automotive suppliers. In the forecast period 2020-25, the segments of electric drives (+475%), batteries and fuel cells (+475%), and ADAS1 and sensors (+150%) show exponential growth. However, the more traditional technologies should not be left out. Fossil fuel engines will remain in the medium term, so there is still a lot of potential in this segment. Not only will large numbers of combustion engine vehicles continue to be sold in the foreseeable future, but also the aftermarket for spare parts to keep these vehicles running for the next decade is likely to be very strong.
The combination of Faurecia and Hella will create the 7th largest global automotive supplier and a global leader in high-growth technology areas. The combined Group will develop a comprehensive product offer for electric vehicles, leveraging on Hella’s portfolio of products among which sensors and actuators related to Battery electric vehicles (BEV), as well as Faurecia’s hybrid systems and hydrogen system solutions.
With a total workforce of 18,500 talented engineers and specialists, including 3,000 software engineers, the new Group will boost the development of innovative projects with high technology content and sustained profitability. To do this, integrating the two companies will be crucial. Hella executives will be given senior management roles, and an integration committee composed of members of the management of both companies will be set up to supervise the integration process.
Sales synergies will arise from the exploitation of each company’s sales channels in different geographic areas. Hella will increase its presence in the Asian market by leveraging Faurecia’s privileged access to key Chinese and Japanese OEMs. On the other hand, Faurecia will benefit from Hella’s strong positioning in the German market to increase its intimacy with German Premium OEMs. Both will benefit from complementary channels with US-based OEMs.
Using the well-established Hella brands, there will be opportunities to expand even more the products offered by including Aftermarket, Services & Repairs, and Special Applications, with the possibility to enter into the business of eco-design products and sustainable materials. In this way, the Group will be prepared to benefit from the zero-emissions mobility market transition. As a matter of fact, combustion engine sales exposure will decrease from 20% in 2021 to 10% in 2025.
Cost synergies and optimization, consisting of procurement, SG&A, and other operating expenses, should generate > €200m EBITDA run-rate. Sales synergies are expected to generate an increase in sales of €300 – €400m by 2025, leveraging on the above-mentioned exploitation of each company’s market presence in different geographic areas. Optimization of working capital and Capex will also bring to an increase in cash flow of €200m per year on average from 2022 to 2025.
Projected key financial metrics for the combined Group, including synergies, shows:
- Strong sales growth, increasing at a CAGR almost double than the market average.
- EBITDA margin around 15%, higher than the industry average of 12.26% (NYU Stern).
On 14th August 2021, Faurecia launched a voluntary public tender cash offer for all HELLA shares at a price of €60.00 ($70.75) per share, which, together with the dividend distributed by HELLA on 5th October 2021 for the fiscal year ending 31st May 2021 to all its shareholders pre-closing, in the amount of € 0.96 per share, corresponds to a premium of:
- 33% on top of the unaffected share price of €45.80 of April 26, 2021, and o
- 24% on top of the last unaffected 3-month VWAP (volume-weighted average price) of €49.10 on April 26, 2021.
Faurecia has also agreed to buy the owner family’s 60% stake at a price of €60.00 per share, paid through a mix of €3.4bn of cash and up to 13,571,428 newly issued Faurecia shares (about €570 million, based on a reference price of €42.063 for one Faurecia share).
As a result, the Hueck family will join Faurecia’s shareholders with up to a 9% share of the capital of the combined company, subject to an 18-month lock-up. A Family representative will join Faurecia’s Board of Directors, underlining the Family’s strong commitment to the combined company.
Hella’s share price closed on Friday at €63.18 apiece, above what Faurecia offered. The transaction represents an estimated total enterprise value of €6.7bn for 100% of Hella. It has been unanimously approved by Faurecia’s Board of Directors and received the support of Hella’s management. Faurecia financed the acquisition mostly through debt.
On 28th October 2021, Faurecia announced that the takeover offer was accepted within the acceptance period for 14,929,369 HELLA shares. All shareholders of HELLA who had not yet accepted the takeover offer could have accepted the takeover offer until 11th November 2021, 24:00 hours (CET) in accordance with the provisions of the offer document.
Perella Weinberg Partners advised Hella management, and Lazard Ltd. advised Faurecia. Societe Generale SA and Natixis SA worked on financing for Faurecia, while Bank of America Corp. provided a fairness opinion to the company’s board.
Sources: Faurecia and Hella Investor Relations, Deloitte, Arthur D. Little, Lazard, Reuters, Bloomberg, Usine Nouvelle