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BorgWarner to Boost Propulsion System on $3.3B Delphi Buyout

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BorgWarner Inc. (BWA - Free Report) recently announced that it will acquire Delphi Technologies (DLPH - Free Report) in an all-stock deal, bringing together two auto suppliers preparing for transformational shift to hybrid and electric vehicles in the industry. The deal values Delphi at about $3.3 billion, including debt.

Deal Terms

Under the terms of the agreement, shareholders of Delphi will receive 0.4534 shares of BorgWarner common stock per Delphi share. The transaction will result in Delphi shareholders owning approximately 16% of the merged company, while the remaining 84% will be controlled by BorgWarner investors. The deal is scheduled to close in the second half of 2020, subject to satisfactory closing conditions and regulatory approvals.

Per Bloomberg, the deal is BorgWarner’s biggest acquisition to date, beating its purchase of Remy International Inc. for about $950 million in 2015.

Deal Benefits

Delphi’s buyout will fortify BorgWarner's combustion, commercial vehicle and aftermarket businesses, which are focused on clean technologies in order to increase efficiency and performance of modern combustion vehicles. It will also improve BorgWarner's power electronics products, capabilities and scale.

The combined entity is likely to maintain a strong balance sheet, with a 2019 pro forma gross debt to adjusted EBITDA ratio of about 1.6x at closing.

By 2023, BorgWarner expects run-rate cost synergies of about $125 million, along with strengthening its power electronics division. The company also anticipates substantial long-term sales synergies, mainly from the opportunity to offer more integrated electrified products, creating additional value for the stockholders.

Moreover, the combined company would offer flexibilities across the combustion, hybrid and electric propulsion lines, which is consistent with BorgWarner's evolution toward the future propulsion industry and transition toward electric vehicles.

BorgWarner’s Share-Repurchase Program

BorgWarner has also approved the implementation of a share-repurchase program of up to $1 billion over the next three years. This is consistent with the company's existing capital-allocation strategy, and demonstrates trust in long-term free cash flow generation.

Preliminary 2019 Financials

BorgWarner’s preliminary full-year 2019 sales are anticipated to be $10,168 million, down 3.4%, year on year. Excluding the impact of foreign currencies and the net impact of acquisitions and divestitures, net sales will likely be up 0.7%, year on year.

Preliminary full-year operating income in 2019 is expected to be around $1,303 million, or 12.8% of net sales compared with the 11.3% recorded in 2018.  Excluding the impact of net pre-tax income related to non-comparable items, adjusted operating income will be $1,232 million.

Preliminary full-year 2019 adjusted free cash flow will be around $692 million compared with the $580 million recorded in 2018.

2020 Outlook

For 2020, BorgWarner expects net sales of $9,750-$10,080 million. The company expects its blended light-vehicle market to be down 2-4% in 2020 and divestiture of the thermostat product line is anticipated to reduce year-over-year sales by nearly $30 million.

Operating margin is expected to lie between 11% and 11.5% in 2020. Cash provided by operating activities is likely to be around $1,250 million, while full-year free cash flow is anticipated in the range of $675-$725 million.

Zacks Rank & Stocks to Consider

BorgWarner currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Auto-Tires-Trucks sector include Gentex Corporation (GNTX - Free Report) and Tesla, Inc. (TSLA - Free Report) , each carrying a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Gentex Corporation has an estimated earnings growth rate of 7.32% for 2020. The company’s shares have appreciated 40.3% in a year’s time.

Tesla has a projected earnings growth rate of 6,460% for the ongoing year. Its shares have surged 83.6% over the past year.

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