ArvinMeritor Divests More Chassis

On June 30, 2009, ArvinMeritor Inc. (ARM) sold the Gabriel Ride Control Products North America, one of the units of its Chassis Ride Control business to private equity firm OpenGate Capital in Los Angeles. The business sold shock absorbers and struts assemblies to automakers. This is ArvinMeritor's third divestment since the beginning of 2009. Recently, the company had divested two other businesses, Meritor Suspension Systems Company ("MSSC") and Gabriel de Venezuela selling similar parts held in its Chassis business under its Light- Vehicle business.

ArvinMertor's Light-Vehicle Systems business accounts for 35% of total sales. This segment manufactures and supplies aperture systems (roof and door systems, and motion control products) and undercarriage systems (suspension and ride control systems, and wheel products) to OEMs. The business makes 46% of sales to Europe and 38% to North America. Body Systems contribute 60% of sales, and Chassis Systems account for 40% of sales. About 25% of sales are made to Volkswagen (VLKAY) and 13% to Chrysler under this segment.

ArvinMeritor stated that the sale of the Gabriel Ride Control Products North America business, together with the divestitures of MSSC and Gabriel de Venezuela, is a part of its strategy to focus on the commercial vehicle on and off-highway market segments for both original equipment manufacturers and aftermarket customers. With the sale of Gabriel Ride Control Products North America, the company has now divested 87% of its Chassis operations.

The company has not disclosed the terms of the transaction. However, ArvinMeritor stated that the sale of the U.S. operations of Gabriel to OpenGate is completed and it expects to complete the sale of a related subsidiary in Mexico within two months.

ArvinMeritor is undergoing dramatic cost reductions through its profit improvement initiative "Performance Plus". The company is divesting its unprofitable auto parts business. It is also expanding geographically and outsourcing more to the low-cost countries. However, difficult conditions in the North American and West European automotive markets are primary concerns.

The company has withdrawn its fiscal 2009 financial outlook and suspended the quarterly dividend. High leverage and the risk of non-compliance of the debt covenants due to deteriorating profits are a concern. These lead us to rate the shares a Hold with a six-month target price of $4.00.

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