BTG Pactual’s Renato Mimica has written the following piece of research and forecast on Brazil’s Iochpe-Maxion, the largest global wheel maker company, which has recently made an acquisition announcement:
Iochpe-Maxion acquires Hayes Lemmerz International. MYPK announced that it has agreed to buy 100% of Hayes Lemmerz (Hayes), the world’s largest producer of wheels for light and commercial vehicles. The company has roughly 70% revenue exposure to light vehicles (45% in aluminum wheels and 55% in steel wheels) and ~30% exposure to steel wheels for commercial vehicles. It has 17 plants in the US, Mexico, Brazil, Germany, Czech Republic, Turkey, Spain, Italy, South Africa, India and Thailand, with Europe representing roughly 50% of revenues, South America 20%; the US 15%; Asia 12%; and Mexico 3%.
A game changer; Becoming truly global. In our recent auto sector initiation report, we argued that international expansion was key to auto-part producers, since OEMs are increasingly prioritizing global sourcing and there is limited room for further growth locally (i.e. above auto industry rates – since domestic markets for each product are pretty much consolidated). While we had identified MYPK as a potential consolidator (indeed, this was one of the pillars of our positive call on the company), this announcement surpassed our expectations. MYPK should now become a truly global player, with a traditional brand and capillarity in most of the world’s regions. And vehicle production growth rates in developed markets could outperform Brazil in the coming years, as markets continue to recover from a very low base.
Iochpe-Maxion to double its size at an inexpensive price and 100% debt. MYPK should pay US$725mn (including US$23mn in debt) to acquire Hayes, which implies an EV/annualized 2011 EBITDA ratio of 3.2x, cheap compared to MYPK’s 5.4x, developed market peers’ ~5x, and also attractive when we consider the potential synergies in both sales and costs. MYPK also plans to issue a 10-year US$-denominated debt bond to fund 100% of the acquisition, which should boost IRRs, and net leverage shouldn’t be an issue at less than 2.5x combined EBITDA. Hayes posted 1H11 net sales of US$890mn (similar to MYPK), while 1H11 EBITDA of US$112mn was slightly below MYPK (due to 280bps lighter margins), and profit of US$39mn fell short of MYPK’s ~US$70mn (we believe lower net margins may also reflect higher depreciation).
Our new target price of R$28/share could prove conservative. While we see the acquisition as transformational for MYPK’s investment case, we have decided to take a conservative approach and assume only part of the potential value accretion in our target price revision, since: (1) the acquisition is still pending approval from anti-trust authorities, given the sizable market share gains involved; and (2) information on Hayes’ financials and growth trends is limited. Although DCF or fair multiple valuations signal much higher values, we are (for now) raising our TP by R$3 to R$28 (reflecting a fair EBITDA multiple of 4x for the acquisition – an arbitrary 20% discount to international peers).
Statement of Risk. Main downside risks are (1) lower than expected GDP growth in Brazil; (2) lower than expected auto sector credit availability; (3) competition from imports or international players; (4) potential M&A; execution (5) flight to liquidity, as average daily trading volume is limited; Main upside risks are (1) stronger than expected economic activity and infrastructure deployement; (2) government incentives to the auto sector; (3) M&A; and international expansion.