An employee of Marelli?fs factory wearing a protective face mask and a vest equipped with battery-powered fans at the waist, to prevent heatstroke during summer season, is seen amid the coronavirus disease (COVID-19) outbreak, in Ora Town, Gunma Prefecture, Japan July 30, 2020. Picture taken July 30, 2020. REUTERS/Naomi Tajitsu
MELBOURNE, March 10 (Reuters Breakingviews) - KKR’s (KKR.N) car crash will obstruct the path for Japanese buyouts. Marelli, an automotive parts supplier the private equity firm built from pieces of Nissan Motor and Stellantis (STLA.MI), kicked off a giant restructuring process with creditors this week. It’s precisely the sort of wreckage feared by local banks, companies and politicians that keeps such deals from kicking into higher gear.
The premise came straight from the private equity owner’s manual: borrow large sums to pluck unloved divisions out of companies, mash them together, hack out costs, improve efficiency and find more customers. KKR in 2016 agreed to acquire Nissan-backed Calsonic Kansei for up to $4.5 billion, and then in 2019 paid $6.5 billion to buy Magneti Marelli from what was then called Fiat Chrysler Automotive.
Although KKR did something similar with smaller medical devices maker PHC (6523.T), steering Marelli proved unwieldy. Shaking up Calsonic was a big enough cultural challenge in a complex industry before even trying to combine it with a larger Italian peer. The pandemic and supply-chain snarls exacerbated problems. Sales tumbled 22% in 2020 from the previous year.
A hulking balance sheet also slowed Marelli down. The Calsonic transaction involved debt equivalent to nearly 6 times EBITDA. Buying Marelli pushed total borrowing to more than 1 trillion yen ($9 billion), probably without lowering the multiple of earnings. Rivals Valeo (VLOF.PA), BorgWarner (BWA.N) and Magna International (MG.TO) all carry a far lower proportion of debt to EBITDA. In May 2020, lenders joined KKR to inject yet another 130 billion yen of capital into Marelli.
KKR may be ready to keep riding with Marelli, as much to preserve its reputation within the Japanese financial firmament as to wring out a return. It installed a new boss in January, and a new capital structure should help. Not all the debris can be easily cleared, however.
Local banks, including Mizuho Financial (8411.T) and Mitsubishi UFJ (8306.T), are among the roughly two-dozen creditors staring down losses from funding Marelli. Tedious negotiations only will make it harder for a widely sceptical Japan Inc to warm to big buyouts, further reflected in Toshiba’s (6502.T) resistance to one partly because of concerns over job losses and excess leverage. Despite mounting pressure on Japanese companies to overhaul themselves, the road ahead for private equity now looks rockier.
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
- Creditors of Marelli Holdings, an auto-parts supplier owned by private equity firm KKR, unanimously agreed on March 7 to use an out-of-court process to restructure the company’s debt, according to market publication Refinitiv LPC.
- KKR in 2016 agreed to buy Calsonic Kansei, which was 41% owned by Nissan Motor, and then in 2019 merged it with Fiat Chrysler Automobiles’ Magneti Marelli, for which it paid about 5.8 billion euros. FCA is now known as Stellantis.
- Japan’s alternative dispute resolution process allows a company to keep operating as it works out a financial solution. All lenders must agree to use the ADR to avoid courtroom insolvency proceedings.
- Marelli is carrying about 1.1 trillion yen ($9.5 billion) of debt. It is held by 26 creditors, with about 360 billion yen of it owed to Mizuho Bank, RLPC reported.
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