KKR car crash will leave redemption wreck in Japan

A Marelli?fs factory worker wearing a protective face mask and waistcoat fitted with battery-powered fans to prevent heatstroke during the summer season is seen amid the coronavirus disease (COVID) outbreak -19), in Ora Town, Gunma Prefecture, Japan July 30, 2020. Picture taken July 30, 2020. REUTERS/Naomi Tajitsu

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MELBOURNE, March 10 (Reuters Breakingviews) – KKR’s (KKR.N) car crash will clog the way for Japanese takeovers. Marelli, an auto parts supplier the private equity firm built from parts of Nissan Motor and Stellantis (STLA.MI), this week launched a giant restructuring process with its creditors. It is precisely the kind of wreckage feared by local banks, businesses and politicians that prevents such transactions from moving into high gear.

The premise came straight from the private equity owner’s manual: borrow large sums to rip out unloved divisions of businesses, smash them together, cut costs, improve efficiency, and find more customers. KKR in 2016 agreed to to acquire Nissan-backed Calsonic Kansei up to $4.5 billion, then in 2019 paid $6.5 billion to buy Magneti Marelli from what was then called Fiat Chrysler Automotive.

Although KKR did something similar with smaller medical device maker PHC (6523.T), Marelli’s management proved unwieldy. Shaking up Calsonic was a pretty big cultural challenge in a complex industry even before trying to combine it with a bigger Italian counterpart. The pandemic and supply chain issues have exacerbated the issues. Sales fell 22% in 2020 compared to the previous year.

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A towering record has also slowed Marelli down. The Calsonic transaction involved debt equivalent to nearly 6 times EBITDA. The purchase of Marelli pushed total borrowings to more than 1 trillion yen ($9 billion), likely without reducing the earnings multiple. Rivals Valeo (VLOF.PA), BorgWarner (BWA.N) and Magna International (MG.TO) all have a much lower ratio of debt to EBITDA. In May 2020, the lenders joined KKR to inject another 130 billion yen of capital in Marelli.

KKR may be ready to keep rolling with Marelli, as much to preserve its reputation within the Japanese financial firmament as to snatch a comeback. He installed a new boss in January and a new capital structure should help. However, not all debris can be easily removed.

Local banks, including Mizuho Financial (8411.T) and Mitsubishi UFJ (8306.T), are among some two dozen creditors seeing losses from Marelli’s financing. Tedious negotiations will only make it harder for highly skeptical Japan Inc to warm up to big buybacks, which is also reflected in Toshiba’s (6502.T) resistance to one, in part due to concerns about job losses and excessive indebtedness. Despite increasing pressure on Japanese companies to restructure, the path forward for private equity now looks more difficult.

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BACKGROUND NEWS

– Creditors of Marelli Holdings, an auto parts supplier owned by private equity firm KKR, unanimously agreed on March 7 to use out-of-court proceedings to restructure the company’s debt, according to the publication. Refinitiv LPC market.

– KKR agreed in 2016 to buy Calsonic Kansei, which was 41% owned by Nissan Motor, then in 2019 merged it with Fiat Chrysler Automobiles’ Magneti Marelli, for which it paid around 5.8 billion euros . FCA is now known as Stellantis.

– Japan’s alternative dispute resolution process allows a business to continue operating while it finds a financial solution. All lenders must agree to use ADR to avoid insolvency court proceedings.

– Marelli carries debt of around 1.1 trillion yen ($9.5 billion). It is held by 26 creditors, including about 360 billion yen owed to Mizuho Bank, RLPC reported.

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Editing by Antony Currie and Thomas Shum

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