By Megan Davies
NEW YORK, March 22 (Reuters) - Investment bankers are anticipating a ramp up in merger and acquisition opportunities in the struggling U.S. auto sector as the industry goes through a gut-wrenching restructuring.
As the Big Three automakers --Corp. , Motor Co. and the unit of Germany's DaimlerChrysler AG -- struggle with high labor costs, shrinking demand and competition from leaner foreign rivals, they and their parts suppliers are having to adapt.
"We do think there will be a lot more consolidation among the auto parts makers," said David Fox, head of Midwest investment banking for JPMorgan Chase & Co. . "That sector is under tremendous pressure right now."
Several suppliers, includingCorp. , Collins & Aikman Corp. and Tower Automotive Inc. , have sought bankruptcy protection. Private equity and hedge fund firms have shown interest in the sector, with Cerberus Capital Management LP and Appaloosa Management LP pursuing Delphi and billionaire investor Carl Icahn bidding for Corp.
Fox said interest could come increasingly from private equity players, which have typically not pursued the industry in recent years because potential acquisition targets tended to be highly leveraged or going through restructurings. Since a number of auto parts makers went into bankruptcy, buyers have a greater opportunity to pick up companies with lower debt and the potential for a good return on equity, he said.
There is also potential for deals involving the Big Three themselves. DaimlerChrysler said in February it was examining strategic options for, which has drawn interest from private equity players as well as GM, sources familiar with the situation have previously told Reuters.
Another banker from a major investment house said M&A activity would continue to increase over the next two or three years.
"The industry is going through one of the most significant restructurings in its history, and while the restructuring is clearly presenting challenges to companies in the sector, I ultimately believe it will result in a healthier auto industry in the long term," said the banker, who requested anonymity.
The value of deals in the U.S. auto industry rose about 60 percent to $47 billion in 2006, according to research firm Dealogic, although as a percentage of total M&A volume, it stayed around the same, between 1 percent and 2 percent.
However, foreign buyers and private equity could be put off buying U.S. car manufacturers due to the high costs of health care and pensions that these unionized companies bear.
"There's a lot of private equity money very interested in purchasing auto parts or manufacturers but they have to be extremely selective to make the numbers work," said Fifth Third Asset Management analyst Mirko Mikelic. "No one wants to be in the situation where unions can make or break you."
A restructured industry could see the Big Three U.S. auto makers shrink further as foreign rivals take share, forcing the suppliers that depend on them to find other business streams and customers, analysts and bankers say.
The shake-up in the sector has had an enormous impact on workers, with Detroit's Big Three automakers announcing more than 80,000 factory job cuts in the past year.
"I think the Big Three will survive -- but smaller," said Burnham Securities analyst David Healy, who also questions whether Chrysler will indeed be sold when buyers take a close look at the size of the operations they would be taking on.
But the increased M&A is likely to keep auto bankers busy.
"We are planning to hire over the next year," said the auto banker who declined to be named, adding that there were significant M&A and financing opportunities as the sector restructures.
Fox said that JPMorgan, which last year had the biggest share of the market for banking in the transportation, paper, packaging and building products industries, might look selectively to add bankers across industry coverage areas. The company provided its ranking, which covers loans, debt and IPO business as well as M&A, saying it came from Dealogic.
Separate Dealogic data showed JPMorgan was the top advisor in auto sector M&A so far this year, followed by Japan's Mizuho . In 2006, the top three were UBS , Merrill Lynch and JPMorgan.
Winning banking business typically comes down not only to relationships, but also to location. Fox said that running JPMorgan's global auto banking business out of Chicago, rather than the bank's headquarters in New York, brings an advantage to the business of advising CEOs both locally and globally.
"We have people not just covering the Midwest talking to their clients locally, but bankers out there talking across the sector," Fox said. "That's very powerful when you're talking to a CEO."