Deals Driver November 2018

Deals driver Automotive trends and transactions

November 2018 kpmg.ca/automotive

Who’s steering? How technology is reshaping the automotive industry By Peter Hatges, Partner & National Automotive Sector Leader, KPMG in Canada

If there is one word that captures the key theme of this year’s Global Automotive Executive Survey (GAES) report it is “disruption”. The automotive industry continues to evolve through innovation and transformational change as industry players are adapting to shifting preferences on car ownership and new technological developments such as Autonomous Vehicles (AVs) and alternative drivetrains. These changes will have the biggest impact on how we drive cars and how they are built.

That being said, nearly half (44 percent) of “Transportation-as-a service” are projected to replace cars in the U.S. executives surveyed in the GAES believe Self-owned vehicles Shared autonomous vehicles that the original equipment manufacturers (OEMs) could be big winners in the battle 6 trillion passeneger miles for the direct customer relationships, and over one-third of global consumers agree. 4 As technology advances, over 80 percent of automotive executives strongly agree that the real viable option for the physical retail outlet 2 is expansion into service factories and used car hubs. The pressure is on, however, as more 0 than half of executives are highly confident ‘14‘15 ‘16‘17 ‘18‘19 ‘20 ‘21 ‘22 ‘23 ‘24 ‘25 ‘26 ‘27 ‘28 ‘29 that the number of physical retail outlets will be reduced by 30 percent to 50 percent by TL S Source: US Department of Transportation, RethinkX 2025. As a result, OEMs may not be as reliant on B2C relationships as different providers may become more prominent in making cars available for consumer use. Could the future look like this?

© 2018 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Autonomy or safety – or both? Future of combustion and electric readiness KPMG’s GAES also revealed that the large majority of Automotive executives are highly convinced that internal executives (94 percent) believe that effective driving policy combustion engines (ICEs) will remain important. One of the and regulations for autonomous driving will be established biggest issues facing the adoption of electric vehicles (EVs) is by 2040, at the latest. The main catalyst for autonomous where the electricity comes from. Some countries, such as driving is safety. Active cruise and steering control, lane the U.S., still rely heavily on coal and other fossil fuels to power departure warning systems and automated braking are all their electricity grid. In Canada, the majority (59 percent) of designed to avoid collisions. While the by-product of this Canada’s electricity generation is derived from hydropower, technology is a self-driving car, the real and immediate impact while the balance of the mix is split between nuclear, oil and is fewer accidents. Collision avoidance will greatly impact and gas, coal and non-hydro renewables. reduce insurance rates, the number of repair facilities and the frequency of replacement rentals. The U.S. Department of Generation by source, 2015 Transportation’s National Motor Vehicle Crash Causation Survey Non-hydro and its 2008 report to Congress concluded that 93 percent of renewables collisions were caused by human error. Current crash statistics 5.9% follow the same trend. Gas/oil/others

Does this mean that the pleasure of driving a car as we know 10.6% it – the ability to steer, brake and control a vehicle – will be the Coal responsibility of sophisticated programming and radar? Will Total manual driving someday become illegal? It could. But what 9.6% Hydro remains clear is that autonomous driving is a new battlefield for 635 58.9% the auto industry that will directly affect consumer demand and TWh have a material and permanent impact on the role of OEMs in the car sharing economy and their future profitability. Nuclear 15% Over time human drivers will likely be seen as dangerous and the ability to drive cars manually may be restricted. Of Source: Natural Resources Canada, “Electricity Facts”, the executives surveyed in the GAES, 74 percent believe that www.nrcan.gc.ca/energy/facts/electricity/20068 mixing autonomous and non-autonomous traffic will lead to severe safety issues. Fully autonomous vehicles and human A gradual shift to e-mobility is generally intended to reduce drivers are unlikely to use the same roads and will require new carbon emissions and mitigate environmental impact. While infrastructure concepts and a unique regulatory environment. hydropower is a relatively emissions-free energy source, If we want autonomous driving to develop quickly, regulators increasing output of hydropower or burning more fossil fuels to will need to adopt a step-by-step approach and start very soon power EVs would reduce the expected environmental benefits by separating areas to avoid mixed traffic of vehicles equipped of e-mobility. with different levels of autonomous technology. Global automotive executives believe there will be a balancing The development of “secured spaces” for an interim period mix of alternative drivetrain technologies and ICEs. E-mobility might be a solution to disconnect AVs from the complexity is dominating executives’ key trend agenda, but its roll-out is of today’s transportation ecosystem. Establishing exclusive, progressing slowly. In addition to the problems associated with separated car lanes for AVs could, however, limit the range of electricity generation, a successful infrastructure set-up seems unusual eventualities that would be otherwise be experienced to be the true showstopper for e-mobility. For now, it takes too in mixed traffic. This would make it nearly impossible to much time for the average consumer to charge an EV, and the include the range of eventualities into an algorithm’s training options are limited. More than half (54 percent) of executives data, which would be required for future integration of AVs surveyed still believe that pure battery EVs will fail due to the and manually driven vehicles. But, if the segregated approach challenge of setting up the required infrastructure. Executives were successful, it may not be necessary to train autonomous have become more optimistic as compared to last year, but vehicles to handle mixed transit. If it works for trains why the obstacles remain high and most consider fuel cell EVs as shouldn’t it work for cars?

© 2018 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. the real breakthrough. However, costs are the biggest obstacle Bob Lutz, former vice chairman of GM, predicts a dire future as fuel cell cars require an entirely new hydrogen infrastructure for the industry and the “end of the automotive era.” Mr. Lutz of reforming plants, pipelines and filling stations. Despite the believes daily travel will migrate to standardized, shared challenges, the advantage of fuel cell vehicles is that they can passenger modules as the transformation of the traditional be “filled up” in a matter of minutes versus several hours for auto industry accelerates. He envisages a future where plug-in EVs. humans adapt to sharing cars with strangers as self-driving cars dominate transportation. In its Rethinking Transportation The end of our love affair with cars? 2020-2030 report, RethinkX, a San Francisco-based think Many of the headwinds we face in alternate fuels and tank, expects that by 2030 most road travel will be via shared autonomous driving will eventually be overcome. But the vehicles. The good news is cars will still be on the road; but the lust for freedom and sense of adventure that comes with companies that manufacture them may become less relevant owning a car will persist. Last year a LaFerrari Aperta supercar if cars become a transportation commodity. sold for a record $10 million at an event in Italy marking the 70th anniversary of Ferrari, the most money ever fetched by a 21st century vehicle. The futuristic Aperta, which had yet to beT assembled and was presented as a digital mock up, sold for twice the amount auctioneers expected after a bidding war between at least 12 auction attendees. For some, the love affair with the automobile still burns brightly.

Peter Hatges is a Partner, Managing Director and National Automotive Sector Leader at KPMG in Canada. Peter has extensive experience in mergers, acquisitions and financing assignments for public and private companies, and has worked on cross-border assignments in Europe and the U.S. He is also a member of KPMG’s North American Corporate Finance Steering Committee.

Declining car ownership KPMG’s GAES shows a year-over-year trend of declining faith in car ownership amongst executives and consumers. This trend is evident across North America as the rate of car ownership per household and the percentage of young people with a driver’s license is declining. However, those survey findings and consumer sentiment are at odds with industry statistics. According to DesRosiers Automotive Consultants Inc., 2017 was a banner year for automotive sales in Canada, with sales of light vehicles up 5 percent last year, exceeding 2 million units for the first time in history, and the U.S. auto market also posted a strong year. In 2018, sales continued on a pace with 2017’s record year. Some of the momentum in sales can be attributed to a resurgence since the 2009 recession, but the continued move towards Crossovers, SUV’s and pickup trucks are a clear signal that North America is still using passenger vehicles to move people and products. Regardless, the trends point to a potential different ownership model for cars in the future.

24.0x

22.0x

20.0x

18.0x

16.0x

14.0x A D

T 12.0x I B E 10.0x M T

L 8.0x / V

E 6.0x

4.0x

2.0x

Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18

GM Magna Johnson Controls Ford BMW Toyota Daimler

Source: Capital IQ

Company comp set

Company name Market Total enterprise LTM tangible LTM total LTM EBITDA LTM diluted capitalization value book value / revenue EPS share

Toyota Motor Corporation (TSE:7203) 236,465 415,109 76 344,927 49,427 10

Volkswagen AG (XTRA:VOW3) 112,814 321,996 150 352,665 30,926 34

Daimler AG (XTRA:DAI) 87,367 263,342 84 248,035 24,674 13

Bayerische Motoren Werke 82,332 209,074 124 145,303 19,602 19 Aktiengesellschaft (DB:BMW)

SAIC Motor Corporation Limited 73,364 75,273 3 174,888 7,083 1 (SHSE:600104)

Honda Motor Co., Ltd. (TSE:7267) 70,317 129,749 48 182,045 16,740 7

General Motors Company (NYSE:GM) 62,249 171,962 29 188,953 26,261 (1)

Nissan Motor Co., Ltd. (TSE:7201) 48,318 128,905 15 138,313 10,945 2

Ford Motor Company (NYSE:F) 48,311 215,855 12 207,900 18,136 2

Fiat Chrysler Automobiles N.V. (BIT:FCA) 35,284 39,377 (3) 167,027 16,901 3

TOTAL 856,821 1,970,642 538 2,150,057 220,693 91

Source: Capital IQ as of Sept 30th, 2018

LTM multiples NTM multiples EV/ EV/ Company Country revenue EBITDA P/E EV/EBITDA EV/EBIT P/E

American Axle & Manufacturing Holdings, Inc. United States 0.8x 4.5x 4.5x 4.5x 7.6x 4.8x

BorgWarner Inc. United States 1.0x 6.1x 16.4x 6.1x 8.1x 9.4x

Cooper Tire & Rubber Company United States 0.6x 4.7x n.m. 5.3x 9.6x 14.5x

Cooper-Standard Holdings Inc. United States 0.7x 5.4x 13.9x 5.1x 7.8x 9.6x

Dana Incorporated United States 0.6x 5.3x 13.8x 4.5x 6.3x 6.0x

Dorman Products, Inc. United States 2.6x 12.3x 22.2x 11.6x 13.2x 17.6x

Ford Motor Company United States 0.2x 2.0x 5.3x 2.5x 4.6x 6.8x

General Motors Company United States 0.3x 2.3x n.m. 2.5x 4.5x 5.8x

Gentex Corporation United States 3.0x 8.7x 12.7x 8.1x 9.8x 12.3x

Gentherm Incorporated United States 1.6x 12.8x n.m. 10.4x 15.2x 18.5x

Harley-Davidson, Inc. United States 1.3x 7.1x 15.2x 7.7x 9.5x 12.2x

Johnson Controls International plc Ireland 1.4x 9.1x 14.1x 8.7x 11.4x 11.8x

LCI Industries United States 0.9x 8.1x 14.2x 7.2x 9.4x 11.5x

Lear Corporation United States 0.5x 4.5x 7.1x 4.5x 5.7x 7.4x

Linamar Corporation Canada 0.8x 5.4x 6.5x 4.8x 6.9x 6.3x

Magna International Inc. Canada 0.5x 5.0x 7.8x 4.8x 6.8x 7.4x

Martinrea International Inc. Canada 0.5x 4.1x 6.3x 3.8x 6.0x 5.8x

Nexteer Automotive Group Limited United States 0.9x 6.8x 10.5x 5.5x 8.0x 10.4x

Tenneco Inc. United States 0.4x 4.0x 8.2x 3.8x 5.2x 5.8x

Tesla, Inc. United States 4.2x n.m. n.m. 17.9x n.m. n.m.

The Goodyear Tire & Rubber Company United States 0.7x 5.5x 21.1x 5.1x 7.6x 7.2x

Thor Industries, Inc. United States 0.5x 5.7x 10.2x 5.8x 7.1x 9.6x

Visteon Corporation United States 0.8x 9.3x 16.6x 7.5x 10.4x 14.0x

Valuation multiples summary

Group average 1.1x 6.3x 11.9x 6.4x 8.2x 9.8x

Group median 0.8x 5.5x 12.7x 5.3x 7.7x 9.5x

Group maximum 4.2x 12.8x 22.2x 17.9x 15.2x 18.5x

Group minimum 0.2x 2.0x 4.5x 2.5x 4.5x 4.8x

Source: Capital IQ as of Sept 30th, 2018

Valuation multiples Country Closed Enterprise EV/LTM EV/LTM Target Acquirer of target date value sales EBITDA

Q1, Q2 & Q3 2018: Top 10 transactions

GKN Limited Melrose Industries PLC United Kingdom 26-Apr-18 15,830 0.9x 9.3x Substantially All Assets of Key Safety Systems, Inc. Japan 10-Apr-18 2,087 n.a n.a Takata Corporation Sage Automotive Interiors, Inc. Asahi Kasei Corporation United States 27-Sep-18 1,407 2.2x n.a L'Orange GmbH (nka:Woodward Woodward Aken GmbH Germany 1-Jun-18 1,054 n.a n.a L'Orange) Aventics GmbH Emerson Automation Solutions Germany 17-Jul-18 796 1.5x n.a FTZ Autodele & Vaerktoj A/S/ Mekonomen AB (publ) Denmark 3-Sep-18 608 0.8x 9.8x INTER-TEAM Sp.z.o.o. Grakon Parent, Inc. Methode Electronics, Inc. United States 12-Sep-18 549 2.6x 10.2x Ningbo Shuanglin Auto Parts Ningbo Shuanglin Auto Parts Co.,Ltd. China 3-Jul-18 428 2.0x n.a Investment Co., Ltd. Interface Performance Materials, Inc. Lydall, Inc. United States 31-Aug-18 345 1.9x 10.2x Reydel Automotive France SAS Samvardhana Motherson Automotive France 3-Aug-18 260 0.2x 3.0x Systems Group B.V.

2017: Top 10 transactions

Mobileye N.V. Intel Corporation Israel 21-Aug-17 20,195 42.0x 120.2x Harman International Industries, Samsung Electronics America, Inc. United States 10-Mar-17 12,036 1.3x 10.4x Incorporated CLARCOR Inc. Parker-Hannifin Corporation United States 28-Feb-17 5,753 3.1x 17.2x Metaldyne Performance Group Inc. American Axle & Manufacturing United States 6-Apr-17 4,376 1.1x 6.9x Holdings, Inc. Calsonic Kansei Corporation KKR & Co. L.P. (nka:KKR & Co. Inc.); Japan 23-Mar-17 4,050 0.3x 5.2x KKR Asian Fund II L.P. Opel Automobile GmbH Peugeot S.A. Germany 1-Aug-17 1,618 0.1x n.a FTE automotive GmbH Valeo SA Germany 31-Oct-17 1,196 1.6x n.m Ahlstrom Oyj Munksjö Oyj Finland 31-Mar-17 1,052 0.7x 6.2x (nka:Ahlstrom-Munksjö Oyj) Robert Bosch Starter Motors China Renaissance Capital Germany 31-Dec-17 817 0.4x 7.6x Generators Holding GmbH (nka:SEG Investment; Zhengzhou Coal Mining Automotive Germany GmbH) Machinery Group Company Limited; Chizhou Zhongan Zhaoshang Equity Investment LLP AutoChips Inc. NavInfo Co., Ltd. China 2-Mar-17 775 n.a n.a

2016: Top 10 transactions

GETRAG Getriebe- und Zahnradfabrik Magna International Inc. Germany 4-Jan-16 3,455 1.4x n.a Hermann Hagenmeyer GmbH & Cie KG SUMEC Group Corporation Changlin Company Limited China 29-Oct-16 1,894 0.2x n.a (nka:Sumec Corporation Limited) Affinia Group Holdings Inc. MANN + HUMMEL Holding GmbH United States 4-May-16 1,749 n.a n.a CGS Holding a.s. Trelleborg AB Czech Republic 31-May-16 1,662 1.9x n.a Alliance Tire Group The Yokohama Rubber Co., Ltd. Israel 1-Jul-16 1,646 3.2x 35.3x Alliance Tire Europe BV The Yokohama Rubber Co., Ltd. Netherlands 1-Jul-16 1,564 2.2x n.a Punch Powertrain nv Ningbo Oriental Yisheng Investment Belgium 31-Aug-16 1,416 4.9x n.a Co., Ltd.; HongKong Oriental Yisheng Investments Co., Ltd. Key Safety Systems, Inc. Ningbo Joyson Electronic Corp. United States 2-Jun-16 1,291 n.a n.a Montupet SA Linamar Corporation France 18-Jan-16 1,233 1.7x 9.1x Shanghai Huizhong Automotive HUAYU Automotive Systems China 18-Jan-16 906 n.a n.a Manufacturing Co., Ltd. Company Limited

Source: Capital IQ as of Sept 30th, 2018

Valuation multiples Country Closed Enterprise EV/LTM EV/LTM Target Acquirer of target date value sales EBITDA

2015: Top 10 transactions

ZF TRW Automotive Holdings Corp. ZF Friedrichshafen AG United States 15-May-15 14,472 0.8x 7.3x Anhui Jianghuai Automobile Anhui Jianghuai Automobile Co., Ltd. China 21-Apr-15 10,524 1.6x n.a Group Co., Ltd. (nka:Anhui Jianghuai Automobile Group Corp.,Ltd.) Hyundai Hysco Co. Ltd. Hyundai Steel Company South Korea 1-Jul-15 2,395 0.5x 5.9x Veyance Technologies, Inc. ContiTech AG United States 30-Jan-15 2,110 0.9x 7.1x (nka:ContiTech USA, Inc.) C.R. Laurence Co., Inc. Oldcastle BuildingEnvelope, Inc. United States 3-Sep-15 1,718 n.a n.a Armored AutoGroup Parent, Inc., Spectrum Brands Holdings, Inc. United States 21-May-15 1,686 3.2x 12.3x (nka:Spectrum Brands Legacy, Inc.) Remy International, Inc. BorgWarner Inc. United States 10-Nov-15 1,525 1.0x 9.3x Eagle Ottawa, LLC Lear Corporation United States 5-Jan-15 926 n.a n.a Delphi Automotive PLC, MAHLE Behr GmbH & Co. KG United Kingdom 1-Jul-15 910 0.5x n.a Thermal Business Stackpole International Inc. Johnson Electric International Canada 27-Oct-15 867 1.8x 10.6x (UK) Limited; JE International Engineered Products Canada Limited; JE International Powder Metal Canada Limited

Valuation multiples summary

Group Minimum 867 0.2x 5.9x Group Median 1,654 1.6x 9.2x Group Average 2,697 1.7x 12.1x Group Maximum 14,472 4.9x 35.3x

Source: Capital IQ as of Sept 30th, 2018 Recent transactions KPMG advised on the following recent transactions:

KPMG Corporate Finance KPMG Corporate Finance KPMG Corporate Finance

acted as the financial advisor acted as the financial advisor acted as financial advisor to Mierins Automotive Group to the shareholders of Cottam to the shareholders of Atlas on the sale of its business to Diecasting Ltd. on its sale to Hydraulics on the sale to Alpha Auto Group Zynik Capital Corporation Gates Corporation

May 2018 July 2018 October 2017

For more information on how our automotive industry practice can help you, please contact our KPMG in Canada professionals today.

Toronto/Vaughan Southwestern Ontario Peter Hatges Doug Dawdy Partner & National Automotive Partner, Deal Advisory Sector Leader 519-747-8807 416-777-3614 [email protected] [email protected] Tom Kostopoulos Tammy Brown Partner in Charge, Enterprise National Industry Leader, 416-224-4153 Industrial Markets [email protected] 416-777-8344 [email protected]

Derek Peters Partner, Audit 416-777-3400 [email protected]

Victoria Wilkes Associate 416-777-8968 [email protected]

For the latest in automotive industry publications, webcasts, and more please visit: kpmg.ca/automotive

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2018 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 22016 The KPMG name and logo are registered trademarks or trademarks of KPMG International.