eResearch| Cerberus Capital Management divested over 25% of its stake in ABC Technologies’ (TSX: ABCT) via an initial public offering “IPO” of 11 million shares, raising C$110 million for the current majority shareholder. ABC did not receive any proceeds from the offering.
ABC Technologies
Founded in 1974, ABC is a Toronto-based automotive parts manufacturer specializing in creating high-performance plastic components. The plastic components offer durability and performance at lower costs and lower weight.
ABC has six product groups comprising of Air Induction Systems, Exterior Systems, Fluid Management, HVAC Systems, Interior Systems, and Flexible & Other. The Company principally sells directly to OEMs and ABC has content in over 75% of all light vehicles manufactured in North America.
ABC reports a 90% parts overlap between electric and internal combustion engines. The electric vehicle subset is likely to capture more market share over that period.
FIGURE 1: U.S. Light Vehicle Sales by Drivertrain
Headwinds
ABC has higher debt than other automotive parts manufacturers Linamar (TSE: LNR) and Magna (TSE: MG | NYSE: MGA). ABC carries a book debt to equity ratio of 3.46, compared to 0.75 and 1.44 for Linamar and Magna, respectively. Higher debt magnifies risks associated with equity ownership, creating the potential for higher returns or losses.
In 2020, ABC‘s revenue was lower and Management attributed it to the COVID-19 pandemic and OEM strikes. ABC reported a net loss of $26.1 million and a 2.2% revenue decline to $822.9 million. The Company expects a return to profitability in 2021, hopefully continuing on its historical annual sales growth of 2.8%.
FIGURE 2: ABC Product Groups.
Automotive Market
Research and Markets expects the North American Automotive Market to grow 7.2% per year from 2020-2025.
Fuel price, economic well-being, expected vehicle lifetime, and interest rates are fundamental drivers for the automotive market. According to the prospectus, unit sales of lightweight vehicles have been relatively steady over the past 15 years, excepting the economic downturn in 2008.
Autonomous driving technology is bolstering valuations for companies such as Tesla (NASDAQ: TSLA) and Uber (NYSE: UBER), which are set to capitalize on decentralized transportation service models. Self-driving cars cart around passengers rather than people owning a vehicle.
The success of self-driving technology could mean lower vehicle volumes and, by extension, decreased revenue for autopart manufacturers. However, ABC management believes that these vehicles will require more plastic & composite components as seating configurations change.
Deal details
Following the initial prospectus, an amendment on February 16, 2021, announced an increased issuance of 1 million shares, from 10 million to 11 million. This news followed reports that ABC downgraded the initial offering from C$255 million to C$100 million after a lukewarm reception.
ABC will continue to be owned mainly by ABC Group Canada LP, a Cerberus Capital Management subsidiary during the lockup period. With up to 79.1% of ABC owned by ABC group, recent share prices set total common share capitalization north of C$500 million.
An additional 1.65 million shares are available through an over-allotment option at C$10 per share for 30 days following February 22, 2021.
ABC’s share price declined from C$10 to C$9.55 over the first week of trading. The lacklustre IPO could relate to the relatively traditional and non-technological business without tremendous growth prospects.
