The automotive sector: a stable proposition?

Mareen Goebel
09 April 2010

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The news that beleaguered Stabilus has been taken over by Triton draws attention to the European automotive sector, which, for private equity, remains a dangerous proposition, according to insiders. Mareen Goebel reports.

Stabilus GmbH has changed hands yet again – Triton Beteiligungsberatung is the fourth private equity owner of the struggling gas springs manufacturer after building its stake in the company by purchasing its debt on the cheap and then acquiring Paine & Partners' equity holding.

According to one industry insider, banks are ruling out the automotive sector altogether now. Paine & Partners' tertiary buyout of Stabilus in early 2008 was one of the last big transactions closed in Germany and, in hindsight, appears to be from a completely different time. When Paine & Partners acquired Stabilus from Montagu for more than €500m, there were clouds on the horizon, but nobody could actually anticipate the strength and ferocity of the financial thunderstorm that was already gathering pace.

At the time of acquisition, Stabilus had a workforce of approximately 3,300 employees worldwide, of which 1,600 were based in Germany, produced more than 132 million gas springs and dampers per annum, and reported revenues for fiscal 2006/07 of €398.2m.

At the height of the downturn, however, Stabilus' situation was affected for the worse. Automotive companies found themselves caught in the centre of the "perfect storm", racing to reduce costs, divest non-core entities and obtain external capital from banks that were either retreating from non-domestic markets, struggling to stay afloat themselves or were frantically attempting to reduce their balance sheets. Sales in the sector plummeted by 40-60% as the global economy ground to a screeching halt. Now that some measure of visibility has returned and recovery is slow and tenuous, many automotive companies are in desperate need of refinancing and fresh capital to return to growth or correct their overly optimistic financial structure.

But the opportunistic acquisition by Triton is only the latest in the sector for private equity. London-based Pamplona Capital Management acquired brake specialist TMD Friction out of insolvency. TMD Friction had been taken over by opportunistic hedge funds, which wrestled control of the company from Montagu Private Equity (then HSBC Private Equity) in 2006.

Carlyle Group was yet another investor that was burnt in the automotive sector – its portfolio company Edscha AG fell into administration even after the private equity firm injected €20m to save its stake in the company it had acquired in 2003 for a reported €185m in equity and more than €200m in debt.

Still though, the automotive sector is ripe for those looking for a challenge. Says one GP: "Provided you have very deep pockets and strong nerves, there could be significant opportunity for a consolidation play in the automotive sector – the main challenge is to sort the wheat from the chaff and find the companies strong enough to survive."