Hellermanntyton (LSE: HTY) — producer of ties, insulation and protection systems for cables in cars — is surging this morning after Delphi Automotive agreed to buy the group for £1.07bn.
Hellermanntyton’s shareholders will receive 480p per share in cash according to Delphi Automotive’s press release on the matter, a 45% premium to yesterday’s closing price of 330p.
Delphi Automotive used to be the auto-parts unit of US automotive giant, General Motors. Now, the group is seeking to capitalise on the increasing demand for cars that connect to electronic devices. Indeed, alone with Hellermanntyton, which will supply the cables for Delphi Automotive’s new ventures, the group has also acquired Ottomatika, a maker of automated-driving software and Quanergy, a company that develops technology that enables cars to detect objects.
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Additionally, Delphi Automotive has made a minority investment in Tula Technology, a maker of engine-control software. Hellermanntyton is anther key part of Delphi Automotive’s plan to dominate the market for connected vehicles.
Commenting on the deal, HellermannTyton’s chairman David Newlands said:
“Delphi’s significant global capabilities in vehicle technologies will provide HellermannTyton with a strong platform to further innovate, grow and better serve its customers. The combination will ensure HellermannTyton continues to lead the way in the provision of cable management solutions.”
The CEO of Delphi Automotive commented:
“We are pleased to have reached this agreement with HellermannTyton, which will uniquely position Delphi to meet customer demand for customised cable management solutions and capitalise on additional growth opportunities in electrical architecture content.”
No competition
Delphi Automotive plans to complete the deal to buy Hellermanntyton during the fourth quarter of this year. It’s unlikely that another buyer will emerge to outbid the US auto-parts producer before management can seal the deal.
Including debt, Delphi Automotive’s offer for Hellermanntyon values the company at 14.7 times last year’s earnings before interest, tax, depreciation and amortization, which is relatively expensive. The wider machinery, equipment & components industry trades at a multiple of around 9.5 times EBITDA. Over the past five years, buyers have paid an average of 8 times EBITDA for components companies.
Nevertheless, for a company like Delphi Automotive, which has a clear-cut strategy to capitalise on the rapidly growing connected car market, it is worth paying a premium to acquire Hellermanntyon.
You see, due to the increasing consumer demand for smartphone features in vehicles and the growing number of telematics devices required by insurers, governments and data analysis firms, the size of the connected car market is expected to explode during the next five years. Specifically, by 2020 the connected car market is expected to be worth $46.7bn after growing at an annual clip of 10.7% between 2015 and 2020.
Delphi Automotive’s integrated offering should allow it to grab a large share of this market. Moreover, thanks to the group’s economies of scale, Delphi Automotive should be able to undercut many of its peers offering the same services and achieve abnormal profit margins.
So, if you’re looking for a play on the rapid growth of the global connected car market, Delphi Automotive could be the best pick.
As it’s unlikely that another bidder for Hellermanntyton will appear any time soon, I think the company’s shareholders should take the cash from Delphi Automotive and run.
Other opportunities
There are plenty of other opportunities out there to replace Hellermanntyton in your portfolio. Here at the Motley Fool, we’re always on the look out for the market’s best deals, hidden gems and contrarian plays.
But there’s more to being a successful investor than just uncovering a few undiscovered gems. It takes careful planning and a well-designed portfolio to help you ride out market volatility and build wealth for the long term.
