Shares of Delphi Technologies PLC soared 61% Tuesday, after BorgWarner Inc. said it’s acquiring the company in all-stock deal with an enterprise value of about $3.3 billion.
BorgWarner BWA, -8.32%, which makes parts for combustion, hybrid and electric vehicles, said Delphi shareholders will receive 0.4534 shares of its stock for each Delphi DLPH, +59.29% share owned, equal to $17.39 a share in cash. That represents a 77% premium over Delphi stock’s closing price Monday. Upon closing, BorgWarner shareholders will own about 84% of the combined company, with Delphi shareholders owning the remaining 16%.
The deal is expected to strengthen BorgWarner’s power electronics business. Delphi specializes in propulsion technologies to make cars cleaner and more efficient. BorgWarner had sales of $10.17 billion in fiscal 2019, while Delphi had sales of $4.36 billion.
The deal is expected to be “meaningfully accretive” to adjusted EPS in the second full year after closing, which is expected to happen in the second half.
Baird analyst David Leiker said the news is positive for Delphi shareholders and will help the company gain scale, lower costs and speed time to market. The knee-jerk roughly 8% decline in BorgWarner shares is “likely misplaced,” he said, as the deal is a positive for the Auburn Hills, Michigan-based company as well.
“We understand a view that this doesn’t reduce exposure to internal combustion engines,” the analyst wrote. However, “while accurate, it increases exposure to the next-gen (likely final gen) version of internal combustion technologies.”
What’s more, it meaningfully expands BorgWarner’s presence in power electronics, charging, and powertrain software, both areas where the company has been expanding. It will also expand the company’s share of non-auto markets, including trucks, off-highway and aftermarket, he wrote.
BorgWarner also updated guidance for 2019 and offered a look at its expectations for 2020. For 2019, the company is expecting to report sales of $10.168 billion, down 3.4% from the year-earlier period. For 2020, it expects sales of $9.750 billion to $10.080 billion, not including the Delphi deal.
Delphi said it expects 2019 revenue of $4.36 billion, which would we down about 10% from 2018.
Baird’s Leiker said the guidance implies that both companies had far better fourth-quarter sales than he expected. The analysts rates both stocks as outperform.
BorgWarner also announced that is board has approved a share buyback of up to $1 billion to be executed over the next three years.
BorgWarner shares have fallen 9% in the last 12 months, while the S&P 500 has gained 24%.