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BorgWarner swoops on Delphi in EV powerplay

Lex Hall  |  29 Jan 2020Text size  Decrease  Increase  |  
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The deal, announced on Tuesday, is a logical move that leverages the products and customer base of both companies and positions them well for the transition to electric cars, Hilgert says.

“We think the shares of both BorgWarner and Delphi represent compelling valuation for investors,” Hilgert said in note.

“The combination of the two companies would bring together internal combustion engine technologies, with little overlap, that should benefit from increasing penetration, albeit in a secular declining internal combustion engine addressable market as battery electric vehicle demand ramps up.

“Even so, the combined entity would have substantial growth potential from the portfolio of vehicle powertrain electrification products. BorgWarner has electrified powertrain hardware while Delphi Technologies has electrical hardware and electronic/software controls for electrified powertrain.”

Even if EV demand fails to develop, Hilgert expects the combined internal combustion engine technologies to ensure “above market growth” because of increasing dollar content per vehicle.

BorgWarner expands capabilities

By 2030, battery electric vehicles will account for one out of every five cars sold, according to Morningstar forecasts.

It’s against that backdrop that this acquisition, BorgWarner’s biggest merger in at least a decade, will add Delphi’s expertise in power electronics and expand its own portfolio as the car industry makes a wider range of vehicles that focus on clean technology.

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By 2030, battery electric vehicles will account for one out of every five cars sold, according to Morningstar forecasts

Both companies specialise in auto transmissions, but BorgWarner – the larger of the two with annual revenue of more than US$10 billion – has been expanding its products for EVs.

The US car parts maker last year bought a 20 per cent stake in battery packs supplier Romeo Power. Other BorgWarner products include electric motors, battery heaters and onboard battery chargers.

The all-stock nature of the deal will ensure the combined entity remains in good health, Hilgert says, adding that BorgWarner’s strong balance sheet has allowed it to snap up attractive acquisitions.

UK-based Delphi, which also makes electronic control modules that manage various powertrain components and other auto parts, said its shareholders would receive 0.4534 shares of BorgWarner for each share held.

That translates to US$17.39 per share, a premium of about 77 per cent to Delphi’s closing price on Monday.

The equity value of the deal is about US$1.5 billion. Delphi had long-term debt US$1.47 billion as of 30 September 2019.

BorgWarner will own about 84 per cent of the combined company after the expected closing of the deal in the second half of 2020, the companies said.

‘Significant upside potential’

Delphi closed last night at US$15.66 – a 68 per cent discount to Hilgert’s standalone fair value estimate for the five-star rated stock of US$55.

BorgWarner closed last night at US$35.43 – a 39 per cent discount to Hilgert’s standalone fair value estimate for the four-star rated stock of US$58.

He values the combined entity at roughly US$68 a share. This represents a 91 per cent price appreciation from BorgWarner’s current market valuation.

“While we believe the transaction substantially undervalues Delphi Technologies as BorgWarner opportunistically takes advantage of the current market valuation, as long as current Delphi Technologies shareholders retain ownership in the shares of the new entity, we expect significant upside price appreciation potential.”


is senior editor for Morningstar Australia

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