Thursday, 3 April 2008

Company Focus – Valeo SA – Pardus Capital vs the Hinduja Bros

The newswire keeps crackling with the emerging clash between PE and Trade proponents of the automotive parts sector as Valeo SA is put under the spotlight for value extraction.

Valeo could be said to be typical of the large, broad-based, multi-systems parts makers that are currently under re-alignment pressure. As we saw with Continental AG recently, there is a need to both create higher-margin innovatory product-lines through M&A and organic efforts, as well as the requirement to relocate low-value manufacturing. Given the massive growth potential of ‘low-end’ systems (eg alternators, starter motors, etc) in developing markets, parts-makers are loathed to simply divest of those divisions, instead preferring JVs – like Valeo-Minda.

That’s very probably the strategy preferred by Karim Samii, President and Chief Investment Officer of Pardus Capital Management based on Madison Ave. He’s keen to create links with Asia’s light engineering base, and mesh its 19% share in Valeo with a 18-20% stake in Visteon obviously seeking great vehicle systems and administrative synergies between the two auto-parts makers.

[Hedge Funds such as Pardus have undeniably been hit by liquidity contraction, but that may be temporary as Middle-Eastern & Asian SWFs, PE and financial institutions look to invest their massive petro-dollar and retail saving holdings. Whilst western banks are following the UBS lead in restructuring their illiquid SIVs to regain helathy balance sheets, it is at such times that private equity can attract foreign finance when strategies prove compelling – as we see with KKR, Blackstone et al in property funds, and undoubtedly the 'value' potential of auto-parts. PE and Hedge Funds have been touting the re-alignment potential, as described above, to a myriad of potential clients, from Japanese Banks to Asian National Pension Funds].

With Valeo and this contextual backdrop in mind, the Hinduja Brothers know that they have to broaden the integral value chain of Ashkok Leyland, and are keen to chase the likes of TATA who’ve set the Indian international M&A pace, before they and Ashkok are left behind. Like Pardus Capital, they too recognise the potential and know they probably only have a small window in which to act before the Pardus dimension of Valeo regains power - with injected liquidity - and so are pushing pushing pushing!