Don Walker, CEO of Magna InternationalDella Rollins
Magna International already flush with cash, has a potent new weapon in its drive to become an even more dominant force among auto parts makers - its common shares.
The buyout of Frank Stronach's controlling stake in the company has helped boost Magna's share-price multiple, making it much more comparable to its peers, which in turn will allow it to finance acquisitions with shares, said Don Walker, Magna's chief executive officer.
"If we have a more normalized stock price, we could use our shares as a currency if we want to make a major acquisition, which we've never been able to do in the past couple of decades," Mr. Walker said.
The use of shares to power growth - as part of what is likely to be a more aggressive acquisition strategy - and a move to deploy cash of about $1.4-billion (U.S.) built up over two decades while Mr. Stronach displayed a strong aversion to debt, are among the changes that will emerge over the short- to medium-term at the Canadian auto parts giant.
A key goal is to put the existing cash to work so that it starts to generate more cash to help the business grow, Mr. Walker said.
"I think the shareholders would prefer to see us do that and use the cash, rather than just have it sit there," he said during an interview at the company's headquarters in Aurora, Ont., where he and chief financial officer Vince Galifi discussed the new era at Magna. That era begins with Mr. Stronach staying on as chairman, but as the owner of 7 per cent of the shares in a widely-held company, instead of the controlling shareholder through his ownership of the entire class of multiple-voting shares.
Magna held $1.7-billion in cash as of the three months ended July 31, but paid out $300-million of that to Mr. Stronach and issued him 9 million common shares in return for the multiple-voting shares.
If the company is going to move to a cash-neutral position, it should do so gradually, cautioned one investment manager whose funds hold Magna shares.
"If they have the chance to make the business better, they should go ahead and do it," said the shareholder, who insisted on anonymity because his firm's policy is not to comment publicly on individual stocks.
The $863-million deal to eliminate Mr. Stronach's multiple-voting shares has contributed, Mr. Galifi said, to a strong improvement in the trading multiple of Magna's common shares. Before the deal, Magna traded at an enterprise value (market capitalization plus debt) to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of 3:6, compared with an average of 5:4 for seven of Magna's peers, including ArvinMeritor Inc., BorgWarner Inc. and Johnson Controls Inc.. Since the announcement of that deal in May and two quarters of strong financial results, the valuation gap has closed sharply; Magna shares now trade at a ratio of 4:1, while the group average has dropped to 4:9.
As Magna's stock valuation climbs, "we'll have a lot more flexibility in growing the company," Mr. Walker said.
Mr. Stronach is fond of tossing out ambitious goals for Magna, suggesting in 2004, for example, that Magna's revenue should rise to $50-billion by 2014. It fell to $17.4-billion last year from $23.7-billion in 2008 amid the worldwide economic slump and the collapse of two of its largest customers into Chapter 11 bankruptcy protection in the United States.
Mr. Walker declined to offer his targets or projections.
But having weathered that storm and restructured its operations by closing several plants in high-cost jurisdictions such as Canada, the United States and Western Europe, Magna is already growing again.
Last week the company announced it will build two new plants in Brazil. One will open next year to provide stampings and welded assemblies. A new interiors plant to supply seats to General Motors Co. will open in 2012.
That came just two weeks after the auto parts maker opened three plants in Russia, including a joint-venture stamping plant that will supply Hyundai Motor Co. of South Korea, one of the fastest-growing global auto makers.
But Brazil and Russia are actually No. 2 and No. 3 on Magna's priority list for growth.
China is No. 1, Mr. Walker said.
Current plans call for Magna to open 11 plants in those three countries and one in Mexico during the next few years.
"The geographic strategy is partly determined by where our customers want us to be and where the growth is going and where we can be competitive," he noted. "It's got to be all three."
Magna's sales in those markets and other areas outside North America and Europe should more than double by 2012, noted analyst Mike Willemse, who follows the company for CIBC World Markets in Toronto. Sales from the non-traditional markets should grow to about $1.6-billion by 2012 from less than $880-million last year, Mr. Willemse said.
Geography will also be a key factor in any acquisitions, Mr. Walker said, along with technology and whether they have customers Magna is targeting. But he acknowledged that if a great opportunity arises and the target doesn't fit those criteria, Magna might buy it anyway.
Another medium-term thrust for Magna is to use the expertise in product engineering and program management in the auto parts business to tackle non-automotive areas such as appliances and new forms of energy generation including solar and wind power.
Magna has booked about $1-billion worth of new business in these areas that will come on-stream by 2014. That compares with about $300-million in revenue now.
"When you look at companies like Johnson Controls, they do it quite successfully and they're rewarded in their share price as well," he said. "It utilizes our existing plants [and]our existing expertise. It's all stuff we can just do."
Magna competes in the automotive interiors business with Johnson, which generates about $13-billion of its $28-billion in annual revenue from systems that control heating, air conditioning, ventilation and fire management in non-residential buildings.
One example of where Magna has spread its wings is in solar energy, where its Cosma metal forming business has won a contract to provide frames and racking for solar arrays being built by Skyline Solar Inc. of Mountain View, Calif.