BorgWarner in Auburn Hills, a global manufacturer of innovative and sustainable mobility solutions for the vehicle market, plans to execute a tax-free spin-off of its fuel systems and aftermarket segments into a separate, publicly traded company, NewCo.
“The BorgWarner board believes a strategic spin-off of our fuel systems and aftermarket segments would be the best path forward to further the transformation of our company,” says Alexis P. Michas, non-executive chairperson of the BorgWarner board.
“The intended separation supports optimizing our combustion portfolio and advancing our electrification journey while NewCo would be able to pursue growth opportunities in alternative fuels, such as hydrogen, and in aftermarket. Ultimately, we expect the intended separation to maximize shareholder value by having two focused and strong companies, each pursuing their respective strategies.”
Following the intended separation, NewCo would consist of the company’s current fuel systems and aftermarket segments. NewCo is expected to be a product leader in fuel systems and aftermarket distribution with balanced exposure among commercial vehicle (CV), light vehicle (LV), and aftermarket end markets, as well as broad regional exposures.
NewCo is expected to benefit from its embedded relationships with global OEMs and focus on the global vehicle parc, which would be predominantly combustion-based through 2040. NewCo would also plan to capitalize on the growth trends in gasoline direct injection and hydrogen injection systems.
Currently, these segments have delivered significant operational and segment margin improvement over the last couple of years, despite the challenging industry volume environment.
NewCo expects to maintain its strong, double-digit operating margin profile, which the company believes should enable it to deliver solid free cash flow. Finally, it is anticipated that NewCo would have moderate leverage and solid liquidity, providing it with the financial flexibility to support its current business operations and longer-term strategies that further enhance shareholder value.
Through the first nine months of 2022, the fuel systems segment generated revenue of approximately $1.7 billion and segment adjusted operating margin of 11.3 percent, while the aftermarket segment generated revenue of just under $1 billion and segment adjusted operating margin of 14.5 percent.
The midpoint of the company’s guidance provided on October 27th included approximately $3.3 billion in revenue, after considering inter-segment eliminations, from the fuel systems and aftermarket segments for the full fiscal year 2022.
“We are incredibly proud of the progress we are making executing our Charging Forward strategy,” says Frédéric B. Lissalde, president and CEO of BorgWarner. “At the same time, our electric vehicle (EV) business is accelerating. We believe we are already on track to exceed our 2025 organic EV sales target, and over the last two years, we have announced or completed four acquisitions.”
Following completion of the intended separation, BorgWarner would consist of the company’s current e-propulsion and drivetrain and air management segments. The company says it’s positioned to be a market leader in EV propulsion, with long-term, secular growth opportunities and an enhanced focus on the development and commercialization of EV technologies, while continuing to deliver top-quartile margins and strong cash generation.
The company expects that the intended separation would better allow BorgWarner to focus resources on attractive organic and inorganic opportunities that position it to deliver and even exceed the goals underlying Charging Forward.
The company estimates that, after giving effect to the intended transaction, it is already on track with its organic bookings and acquisitions to date to deliver more than 22 percent of its revenue from electric vehicles by 2025, less than two years into the execution of its five-year strategy.
With continued execution of its electrification growth initiatives, the company believes that it would ultimately achieve or exceed its stated target of 25 percent of revenue from electric vehicles by 2025.
Through the first nine months of 2022, BorgWarner’s air management segment generated revenue of approximately $5.5 billion and segment adjusted operating margin of 13.7 percent, while its e-propulsion and drivetrain segment generated revenue of approximately $3.9 billion and segment adjusted operating margin of 6.9 percent.
The midpoint of the company’s guidance provided on Oct. 27 included approximately $12.3 billion in revenue, after considering inter-segment eliminations, from BorgWarner’s e-propulsion and drivetrain and air management segments for the full fiscal year 2022.
Immediately following completion of the intended transaction, BorgWarner shareholders would own shares of both companies. The company expects to complete the transaction in late 2023, subject to satisfaction of customary conditions. BorgWarner states there can be no assurance regarding the ultimate timing of the intended transaction or that it would be completed.
