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Analysis indicates that global aggregate auto supplier enterprise values will increase over $400 billion by the spring of 2022 (two years after the pandemic began), leading to robust M&A activity in the next 24 months.
While economic, social, and pandemic-related factors continue to impact many businesses and create global uncertainty, a contrarian—that is, optimistic—viewpoint is emerging for the health and value of automotive suppliers over the next 24 months. Considering the sector’s history of a strong reemergence from the 2008-2009 economic crisis, automotive suppliers are more resilient and flexible than many give them credit for. Data analysis and recent interactions with numerous automotive suppliers, industry lenders, and private equity firms also suggest a favorable route ahead.
Although the industry is on a long-term path toward electrification and connectivity, the near-to mid-term dynamics offer equally pressing importance. It is important to consider these factors related to revenue, profitability, resulting enterprise value and how these elements may translate into increased mergers and acquisitions (M&A) activity.
Analysis indicates:
- 2020 revenue presented a 23% decrease from the prior year. Many investments in new initiatives likely had to be delayed due to lower than originally forecasted earnings.
- The average EBITDA percentage achieved in 2020 was still 9.2% (versus 11.1% in 2019). Nearly half of the suppliers in the sample exceeded that average mark, and only one of the suppliers posted negative EBITDA for 2020.
- Relative to 2019, major impacts occurred in 2020 which should not be underestimated. Suppliers in the sample population alone lost an estimated $13 billion, or over $75 billion of enterprise value year-over-year, based on an EBITDA multiple approach.
- The average EBITDA dollars lost in 2020 compared to 2019 surpassed $300 million, with seven suppliers losing more than $500 million. In one case, a large Tier 1 supplier actually improved EBITDA margin by 15% in 2020 over 2019, but the depressed revenue levels still resulted in lower year-over-year EBITDA of almost $60 million.
At a time when the automotive industry is at an inflection point fueled by megatrends, the unforeseen disruptions that caused lost EBITDA delivered a staggering blow. The anticipated earnings that had been earmarked for future investment and strategic initiative funding may now be delayed, and the circumstances also resulted in depressed enterprise values.
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