Magna reportedly “seriously considering” Chrysler purchase

Rumours that Aurora, Ont.-based Tier One automotive parts supplier Magna International Inc. is thinking about buying the Chrysler Group have been swirling for days, and a note released yesterday by an equity analyst is adding fuel to the speculation.

KeyBanc Capital Markets analyst Brett Hoselton issued a note for clients which said Magna has been doing a substantial amount of due diligence work, and is “seriously considering” a potential purchase.

“According to our sources, [Magna] management has come to believe it has reached a plateau as a supplier and a niche contract assembler of vehicles,” the note stated. “We believe the company views its increased involvement in the design, research and development of both platforms and entire vehicles as the natural progression of its current capabilities, which would provide its next phase of growth.”

Hoselton cited unnamed internal Magna personnel as his sources for the information. He also noted that a merger between the two entities is a “low-probability outcome,” and did not change his hold rating for the auto parts supplier.

According to Hoseltons sources, the initial due diligence work by Magna has included a meeting between Magna executives and leaders from the United Auto Workers (UAW), access to Chryslers financial data and visits to Chryslers facilities by Magna general managers.

When reached yesterday, many of the investor analysts for Magna refused to comment on the conjecture surrounding Magnas potential acquisition of the ailing auto manufacturer. Speaking off the record, one analyst said the potential purchase was in line with Magnas ambitions of becoming a “low-cost, one-stop shop” supply chain, but the scope of the acquisition is a little too ambitious at this time.

The analyst noted that Magna would have a difficult time gaining the consent of its major stakeholders because of the risks associated with such a purchase.

Hoseltons note acknowledged that several other factors stand in the way of a Chrysler buy out. Among them is the affect vertical integration will have on Magnas relationship with other automakers.

“As [Magna] becomes a direct competitor of its automaker customers, it risks losing future business to other suppliers,” the report said. “GM and Ford account for nearly 40 per cent of sales alone. We also believe direct competition would make it more difficult for [Magna] to grow its business with other automakers.”

The company has been a leader in the business of designing, engineering and manufacturing auto part systems, including plastic body, lighting exterior and trim systems. As of September 2006, Magna had 228 production centres and 62 engineering and R&D centres in 23 different countries.

Magna spokesperson Dan Donovan refused to comment on the speculation surrounding the company. So far, Magna has not issued any direct comment regarding a potential bid for the automaker.

Magna reported a sharp drop in its fourth quarter and full-year profits for 2006 this morning. Magna’s net income for the fourth quarter of 2006 was $29 million U.S., down 65 per cent from $83 million U.S. in the fourth quarter of 2005. The Magna’s full-year net income also took a hit, with $528 million U.S. for 2006 compared to $639 million for 2005.As a result, the companys dividends were halved to only 19 cents U.S. per share.

“The difficult automotive environment during 2006, particularly in North America, took its toll on our 2006 financial results,” said Magna executive vice president chief financial officer Vince Galifi in the release. “We believe it is prudent to review all uses of cash with an eye maintaining our strong financial position in light of continuing industry challenges.”

In its quarterly report, Magna said the slumping production levels of the Big Three, especially for certain light trucks, had a negative impact on the suppliers sales and earnings.

Canadian Plastics will continue to watch this developing story, and our website will be updated with the most recent news surrounding Magnas alleged interest in the acquisition of the Chrysler Group.