DBRS Comments on Magna’s Announced Acquisition of the Getrag Group of Companies

DBRS Limited (DBRS) today notes that Magna International Inc. (Magna or the Company) on July 16, 2015, announced an agreement to acquire the Getrag Group of Companies (Getrag), one of the world’s largest automotive transmission suppliers. The purchase price for the acquisition of 100% the equity of Getrag (the Acquisition) is stated at EUR 1.75 billion (in addition to assumed indebtedness and pension obligations), with the Acquisition expected to close by the end of this year. DBRS notes that the Acquisition, if completed under the terms recently communicated by Magna, would have no impact on the current long- and short-term ratings of A (low) and R-1 (low) respectively.

The Acquisition follows additional announced/completed divestitures of Magna as it continues to refine its product portfolio. These include the sale of the Company’s battery pack business and the announced sale (expected to close this quarter) of substantially all of Magna’s interiors business (excluding seating). DBRS notes that the Acquisition would be modestly positive to Magna’s business profile, as it would further strengthen the Company’s competitive position in the Powertrains business while also serving to increase its presence in China (where Getrag has two joint ventures, in addition to close ties to several local automotive OEMs).

As concerns the Acquisition’s impact on Magna’s financial risk profile, DBRS notes that the Company has been progressively adopting a slightly less conservative financial policy, with Magna having previously outlined a targeted debt (adjusted for operating leases)-to-EBITDA ratio within the range of 1.0 times (x) to 1.5x by year-end 2015. While the exact specifics remain to be determined, Magna has indicated that the Acquisition is to be funded by a combination of cash and additional indebtedness (either in the form of bank lines or debt capital market issuances), with its debt-to-EBITDA ratio (on a pro forma basis accounting for the Acquisition) likely being at a level of approximately 1.2x. DBRS observes that while this represents a material increase in the Company’s financial leverage, Magna’s credit metrics post-Acquisition would nonetheless remain commensurate with the current ratings; specifically, whereas balance sheet leverage (i.e., adjusted debt-to-total capitalization) would migrate to a level somewhat aggressive for the ratings, this is more than offset by cash flow- and coverage-based metrics that remain at strong levels. However, DBRS also observes that the Acquisition (and associated increased in leverage) has meaningfully reduced Magna’s cushion against unexpected challenges at this ratings level. As such, any further sizeable acquisition or, alternatively, any substantial share repurchases (or similar shareholder-friendly activities) that would cause Magna to materially deviate from its current financial policy, could potentially pressure the ratings.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Automotive Supplier Industry, which can be found on our website under Methodologies.