TRW Automotive Agrees to $11.7 Billion Sale

Purchase by ZF Friedrichshafen Will Create World’s Second-Largest Auto Parts Supplier

The merger, announced Monday, establishes an automotive parts supplier with potential annual revenue of about $41 billion, ranked No. 2 after Germany’s Robert Bosch GmbH and ahead of Japan’s Denso

6902.TO in Your Value Your Change Short position The combined group will be a new industry powerhouse, with about 138,000 employees, aimed at feeding a technology-hungry car industry with systems to power and control electric vehicles, cars connected to the Internet, and systems to empower driverless cars that are expected to move onto the highway in the next few years.

“We need to be big and powerful to serve those needs,” Stefan Sommer, chief executive of ZF, told reporters on a conference call. “The major motivation for this transaction is technology-driven and to serve markets in the field of electro-mobility and autonomous driving.”

ZF agreed to pay $105.60 for TRW, a 1.7% premium over the Livonia, Mich.-based company’s most recent closing share price of $103.85. ZF will finance the acquisition with debt, raising initial financing from a loan from Deutsche Bank DBK.XE in Your Value Your Change Short position and Citigroup.

C in Your Value Your Change Short position The company said it would seek financing from additional banks with a bond offering in about six months. Mr. Sommer said he expects the deal to close in the first half of 2015.

TRW makes brakes and air bags, along with other safety parts, while ZF specializes in transmissions and steering systems, along with other critical parts. TRW will operate as a separate business division within ZF, the companies said.

ZF is a closely held German engineering company whose main shareholder is Zeppelin Foundation, the heir to the industrial empire founded by Ferdinand von Zeppelin in 1915 to produce gears for German airships. After World War II, the company became famous for producing the first fully automatic transmission.

Last month, the deal appeared to hit a snag over concerns that a steering systems joint venture between ZF and Bosch could raise competition issues and block a deal. On Monday, ZF and Bosch announced that Bosch would purchase ZF’s stake in the venture—ZF Lenksysteme GmbH—clearing the way for ZF to acquire TRW

“The 50% share we have in ZF Lenksysteme would hurt some antitrust rules in some areas of the world so it was important to solve that,” Mr. Sommer said

The deal comes amid a flurry of merger activity in the supplier industry. Since ZF first confirmed in July that it was preparing a bid for TRW, other major auto suppliers such as U.S.-based Delphi Automotive DLPH in Your Value Your Change Short position and BorgWarner, and Swedish safety parts maker Autoliv

have expressed interest in bulking up through acquisitions. Suppliers are increasingly concerned about being left behind by rivals with advanced technology as well as not having sufficient firepower to develop the proper technology.

Car makers are investing huge sums to develop electric autos, information technology systems to connect cars to the Internet, and autonomous driving systems made famous by the much-hyped Google car. But the car makers can’t do it on their own. Big manufacturers such as Germany’s VolkswagenVOW3.XE in Your Value Your Change Short position , Europe’s biggest auto maker by sales, rely on suppliers such as ZF, TRW and Bosch to deliver not just individual parts but complete systems.

Ulrich Hackenberg, a Volkswagen board member in charge of development, welcomed the merger of ZF and TRW, two of VW’s main suppliers.

“It is very positive to have a strong partner that has the resources to meet these challenges that we face such as controlling the automobile, autonomous driving, driving safety that requires an ever larger amount of development,” Mr. Hackenberg told The Wall Street Journal.

Speaking to reporters, Mr. Sommer said that ZF is determined to be one of the top suppliers in the world. The key, he said, is acquiring and developing the right technology to serve the needs of customers like VW. TRW is a major acquisition for the former Zeppelin maker, but it is not likely to be the last move by ZF as it seeks to adapt its business to changes shaking the car industry.

“I won’t rule out further mergers in the future,” he said. “Our company is powerful enough to do this.”


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