ZF Friedrichshafen agreed to buy U.S.-based TRW Automotive for $13.5 billion including debt, creating a major global supplier ready for an age of self-driving cars.
The all-cash transaction will create a player with combined annual sales of more than $40 billion, more than doubling ZF's sales in two of the world's largest car markets: China and the U.S.
It will marry ZF, a major provider of steering systems and drivetrains, with a leading maker of automotive safety products such as brakes and air bags.
ZF, which already helps carmakers develop hybrid-powered transmissions, had been on the lookout for a strategic partner after an analysis showed semi-autonomous driving functions and vehicle connectivity will develop into important business areas.
"The major motivation for this transaction is technology driven, in the field of electromobility and in the field of autonomous driving," ZF CEO Stefan Sommer said on a conference call on Monday.
In a note, Morgan Stanley analyst Ravi Shanker said TRW's active safety, passive safety and steering technologies, together with its software capability, would allow it to control the key elements of an autonomous car.
"Together with ZF's portfolio of mechanical solutions for chassis, transmission and drivetrain control, there would be few parts of an autonomous car -- mechanical or electronic -- that a ZF and TRW combination could not potentially dominate," the note said.
ZF is offering $105.60 in cash for each TRW share, or nearly $12 billion based on shares outstanding. That is a premium of 16 percent over the U.S. company's closing price on July 9, before ZF's interest emerged.
The price represents a multiple of 7.6 times TRW's earnings before interest, tax, depreciation and amortization for the year through June 2014, making it one of the most expensive takeovers in the auto parts sector.
TRW, based in Livonia, Michigan, is a global maker of air bags, electronics and braking and steering equipment. It sells to nearly all major automakers, including Ford and General Motors.
TRW, which had sales of $17.43 billion last year, counts Volkswagen Group as its largest customer and derives about 40 percent of its revenue from Europe.
ZF supplies chassis components to companies including Audi and BMW, and generates about half its revenue which totaled 16.84 billion euros ($21.7 billion) in 2013 in Europe.
For ZF, controlled by the Zeppelin Foundation of Friedrichshafen, a small city on the shores of Lake Constance, it marks a leap into the world of capital markets. It will seek a credit rating so it can issue bonds to finance the deal.
The transaction is subject to antitrust and U.S. foreign investment clearance and is expected to close in the first half of 2015, ZF said.
"ZF started to create a long-term strategy focused on the year 2025. We have seen we need certain growth to be a Tier 1 supplier," Sommer said, adding that ZF would consider additional deals in future if they made strategic sense.
The combination of ZF and TRW creates a new platform for serving the world's largest automakers, Sommer said, adding that ZF and TRW's portfolios were complementary.
Buying TRW is an attempt by ZF to increase its exposure to sensors and electronic components. Stricter safety and anti-pollution rules have forced carmakers to install more complex onboard electronics that help to make acceleration, braking and engine management systems more intelligent.
Goldman Sachs Group acted as financial adviser to TRW and Simpson Thacher & Bartlett LLP and Gleiss Lutz were legal advisers. Citigroup Inc and Deutsche Bank advised ZF, while Sullivan & Cromwell acted as legal adviser.
ZF said it had received a bridge loan from Citigroup and Deutsche Bank. ZF could issue a bond in the next six months to help finance the deal.
'Scale and depth'
“The combined companies are clearly going to have a lot of scale and depth,” said Joseph Spak, an analyst for RBC Capital Markets in New York. “They’re combining a number of key technologies as the world is moving toward autonomous driving.”
ZF has said TRW will be operated as a separate business division within ZF, the statement said.
"We have long respected ZF as a very successful company in our industry with similar values and focus on innovation," TRW CEO John Plant said in a statement. "This transaction provides significant benefits for our shareholders who will receive full and certain value for their shares, as well as for our employees, customers and communities, all of which will reap the benefits of being part of a larger, more diversified global organization."
Fred Hubacker, managing director of the consulting firm Conway Mackenzie Inc., said the deal creates a "global powerhouse in driveline, chassis and electronics controls."
"There's very little duplication in production between the two companies,” Hubacker said, “and together it will likely dominate several segments."
Mike Wall, director of automotive analysis for IHS Automotive Group LLC, said the deal represents more consolidation through the supply chain as companies chase new technologies.
"The broader story, of course, would seem to reside with the technology component of the deal and the continuing quest for suppliers to build a product portfolio with future growth potential and opportunities to build global economies of scale," Wall said.
"I don’t know that it fundamentally changes the industry, but it is another example of a supply chain that continues to evolve and one which could likely result in larger, and perhaps fewer, Tier 1's."
ZF ranks No. 9 on the Automotive News Europe list of the top 100 global suppliers, with worldwide sales to automakers of $20.4 billion in 2013. TRW ranks 11th and Bosch is No. 1. For a look at the 2013 ranking, click here.
ZF’s bid for TRW marks the biggest deal since ball-bearings maker Schaeffler AG tried to take over Continental in 2008 in a transaction resisted by the target’s board. The endeavor hit headwinds as stock markets tanked during the financial crisis and Schaeffler’s debt ballooned.
Sommer said the two deals are totally different in part because the push for TRW is “friendly, not hostile.”
Dustin Walsh of Crain's Detroit Business, Philip Nussel of Automotive News, Bloomberg and Reuters contributed to this report.