Analysis: Conti, Cooper Standard upbeat about AVS deal

Novi, Michigan – Continental AG's Vibration Control business, which produces anti-vibration parts like engine mounts for the automotive industry, has a strong global presence, with 10 manufacturing plants mostly concentrated in Europe. But it needed to enhance its presence in North America.

Cooper Standard Automotive Inc.'s Anti-Vibration Systems business makes similar parts, but its strength is in the US and Canada, with one site in France and two in India through a joint venture.

So, when the chance for Conti to acquire the Cooper Standard unit came along, it capitalised. Cooper Standard agreed to sell its AVS unit to the German group for $265.5 million, subject to closing conditions and antitrust approvals.

Continental projects the deal to close sometime in the first half of 2019.

"We are now a real global player in all relevant markets for the automotive business," said Kai Fruehauf, head of Continental's Vibration Control business unit. "We can really serve customers today out of one hand."

If the deal is approved, the business will operate 15 facilities – five in Germany; two in France; one in Slovakia; one in Mexico; one in Brazil; one in China; one in Auburn, Ind.; one in Mitchell, Ontario; and will hold a 50% stake in Sujan Cooper, a JV in India that operates sites in Pune and Chennai.

The combined business will generate sales of about $737.8 million. Cooper Standard reported about $326.7 million for its AVS unit in 2017. The business employs about 1,000 people globally, and Fruehauf said all will transfer with the business.

"Cooper AVS is a profitable unit and we plan to continue to operate all plants," Fruehauf said. "We're not talking about a restructuring case."

Jeff Edwards, Cooper Standard chairman and CEO, said on a conference call that the firm's strategic vision is to be No. 1 or No. 2 in all product lines. And given the scale of its AVS business in relation to its competitors in the market, Cooper determined that it could not realistically expect it to grow into a top global player.

Cooper's AVS business held about a 3% share of the $10-billion global market, according to Cooper. Conti's unit reported 2017 sales of about $411.1 million.

"We believe that this decision will enable this business to grow to its full potential," Edwards said.

Broad portfolio

Cooper Standard's products include conventional and polyurethane strut mounts, spring seats and jounce bumpers; conventional and hydraulic bushings; conventional and hydraulic body and cradle mounts; mass dampers; and bi-compound bushings, among others.

Continental has similar technology, but serves different platforms. Conti's European customer base is focused more on small, medium and luxury vehicles. Cooper Standard's US customers are strong in trucks, light trucks and sport-utility vehicles.

"We have complementary technologies that fit very well together to support new customer trends," said Fruehauf, adding that the business will help Continental address future vehicle technologies.

Vibration Controls already provides mounts for electric vehicle auto makers in Europe and China. Fruehauf said hybrids also bring strong opportunities as the combined internal combustion/battery engine is heavier than the solo versions, requiring more efficient engine mounts.

And because engine noise is virtually eliminated in a pure electric vehicle, Fruehauf said the company is seeing a need for its technologies in other areas of the vehicle now that the noise emitted is more noticeable.

"That is why Continental is investing in this business," Fruehauf said. "We see good growth opportunities for the future."

New focus

If the deal is approved, Cooper Standard's core product categories will reduce to three – rubber and plastics sealing, fuel and brake lines, and fluid transfer hoses. All three generated greater sales than the firm's AVS business.

Its sealing business is the largest at $1.91 billion, or more than half of the company's overall sales for 2017, while its fuel and brake and fluid transfer business generated $757.2 million and $521.6 million, respectively.

Edwards added that the firm has set a goal for 25-30% of Cooper Standard's revenue to come from non-automotive applications within the 2023-25 time period. Currently, its Advanced Technology Group accounted for less than 5% of the firm's $3.62 billion in consolidated 2017 sales.

"The sale of our AVS business when completed will free up capital and management resources that we can reinvest in our core product lines where we have a greater competitive position and better growth potential," Edwards said. "More importantly, it gives us the opportunity to accelerate the growth of our Advanced Technology Group business."

Cooper Standard has been quite busy on these fronts, already agreeing to three acquisitions this year, two of which will enhance its global fuel and brake business. Most recently, the firm acquired Hutchings Automotive Products, which Edwards said will help solidify its leading market position in its fuel and brake delivery and FTS product lines.

In May, the company acquired 80.1% of LS Mtron Ltd's automotive parts business. The South Korea-based firm produces jounce brake lines and charge air cooling technology, which complements its current fuel and brake delivery systems, and automotive fluid transfer product lines.

On the non-automotive side, Cooper Standard agreed to acquire Lauren Manufacturing and Lauren Plastics – two subsidiaries of New Philadelphia, Ohio-based Lauren International Ltd – for an undisclosed amount in July.

Lauren's manufacturing and plastics businesses produce extruded and moulded parts of organic, silicone, thermoplastic and engineered polymer products. The units specialise in sealing solutions for industrial and speciality automotive applications.

In the third quarter, the firm reached a second licensing agreement with an unidentified "major North American material compounding company with an extensive sales force and customer base" to use its Fortrex technology outside of the automotive industry.

Fortrex is a new lightweight elastomeric material that combines the best attributes of EPDM and thermoplastic vulcanisates, two common materials used in sealing. Edwards said interest from other potential licensees remains strong and he hopes to be able to announce more agreements in the near future.

"We will generate revenue and profit for royalty income based on the licensees' sale of Fortrex products to its customers," Edwards said. "We believe this agreement is further a validation of the value of Fortrex material science and an important step toward our strategic goal to diversify our company."