Fitch Ratings says today that it expects M&A- and LBO-related event risk to rise in the European automotive supplier sector as trade buyers and private equity firms drive further consolidation in the industry.

"While some sub-sectors such as electronic brake-systems are already fairly consolidated, the overall industry structure is still quite fragmented and will face further consolidation in view of ongoing industry globalization," says Markus Leitner, Director in Fitch's European Industrials team. "The integration of smaller suppliers into larger groups will ensure the necessary funding for their R&D programmes and the global expansion required by the OEMs. This would in turn safeguard the innovation-led approach carried out by these suppliers to defend their market positions."

Fitch expects M&A activity to be particularly driven by suppliers keen to expand their geographical scope or acquire complementary high-quality assets to extend their technological footprint. Recent examples include Continental AG's (rated 'BBB+'/'F2'/Stable) acquisition of the automotive electronics business of Motorola Inc. for USD1 billion, which followed the acquisition of Phoenix in 2004. Fitch also expects Continental to pursue further acquisitions in the short to medium term. At the same time the agency notes that Continental was the recent target of a private equity investor for a potential takeover bid. While this process has been terminated by mutual agreement, LBO risks remain present.

In early 2006, Robert Bosch GmbH ("Bosch", rated 'F1+') together with Mann+Hummel acquired the Purolator filter business from ArvinMeritor Inc. (rated 'BB'/Negative). In addition, Bosch intends to buy Australian brake manufacturer Pacifica Group Ltd., which has an estimated transaction value of approximately EUR300 million, subject to various conditions. On the other hand, conglomerate ThyssenKrupp AG (rated 'BBB+'/'F2'/Rating Watch Negative) recently sold its struggling body and chassis operations in North America to Canadian supplier Martinrea International Inc., which accounted for sales of approximately EUR1 billion.

The current US supplier crisis, which has been affecting many prominent players such as Delphi Corporation, Visteon Corporation (rated 'CCC'/Negative) and Dana Corporation, could represent an opportunity for leading European suppliers with strong balance sheets and ample financial firepower to expand rapidly into the North American markets. Such transactions would enable them to boost growth in what are otherwise fairly mature Western car markets. To date, however, most European players have only been in a standby position, closely monitoring US developments and seeking information about the quality of available assets.

Alliances are proving to be another attractive form of sector consolidation. Suppliers are increasingly willing to bundle their complementary expertise and resources in co-operative agreements and share the increasing costs of operations and related risks. An example is the co-operation between Continental and automotive drive and chassis technology supplier ZF Friedrichshafen AG to develop hybrid technology systems. The joint ventures of Hella KGaA Hueck & Co., a supplier of automotive lighting and electronics components and systems, and Behr GmbH & Co. KG, a vehicle air-conditioning and engine cooling specialist, are other examples of successful co-operations.