Auto Suppliers: Do You See What I See?
February 08, 2007

A wise friend has seen a lot in his 75 years. When people ask his perspective on the transformation of the U.S. auto industry or changes he’s witnessed in his hometown of Detroit, he simply tells them: “Things change.” Plain and simple, things change. No judgment.

Indeed, the only certainties in life are death, taxes – and change. Change, while traumatic for some, is an opportunity for others.

That’s apparently what some brave, optimistic investors outside the auto industry see in the downtrodden auto parts business that many inside the industry don’t see.

Namely, they see undervalued businesses with upside potential – and their chance to make a buck.

Billionaire investor Carl Icahn just this week bid $2.75 billion ($36/share) for the Detroit-based Lear Corp., an auto interiors and seat supplier.

His bid comes as a number of auto suppliers, most notably Delphi Corp., are in Chapter 11, with more bankruptcies predicted. Suppliers have been socked by lower sales and parts needs from Ford, General Motors and Chrysler as well as by competition from low-cost countries. But Icahan sees opportunity. He's also invested in Dana Corp., now in bankruptcy, and Federal-Mogul Corp., about to emerge from a long and costly bankruptcy proceeding.

Already the largest investor in Lear, Icahn is thought to be either bidding to own the entire automotive supplier or to spur competing offers. Icahn told the Wall Street Journal the beaten-down share prices of auto suppliers like Lear have made them attractive values. "What's exciting is when you buy them when no one wants them," Icahn told the paper.

Lear’s stock rose following Icahn’s bid, but its third-largest shareholder, fund manager Pzena Investment Management LLC, called for company directors to oppose the bid, saying it was too low in view of the company’s long-term value.

Other private-equity firms and hedge funds as well as financier Wilbur Ross have been buying into auto supply companies over the past two years. Some existing suppliers are looking to merge or buy up failing companies. Richard Dauch, CEO of American Axle & Manufacturing Holdings Inc., told trade journal Automotive News he’s “prepared to lead as a consolidator” of weak and distressed competitors.

Dana Johnson, chief economist for Michigan’s Comerica Bank, reinforced what these investors see. Johnson predicts a bottoming out of the auto and auto-supplier downslide by late this year. 

It takes a lot of guts to make these bold moves, but the auto supplier business is here to stay – it’ll just change.

Posted by Michelle Krebs at 5:33 AM under Companies | Comments (1) | digg this | Seed Newsvine