HONG KONG (Reuters) - Takata’s failure is remodelling the auto-safety industry. The Japanese group has filed for bankruptcy protection in the United States and Japan, citing more than $10 billion of liabilities related to lethal airbags. This is a big opportunity for smaller rival Key Safety Systems, a Chinese-owned American brand which agreed in principle to buy most of the business for $1.6 billion.
There was no way the Japanese parts supplier could afford the industry’s biggest-ever recall. So while some proceeds will go into an $850 million restitution fund, as agreed with the U.S. Department of Justice, that will hardly cover the total costs incurred by its customers, including Honda, Toyota and others.
Still, the outcome should minimise disruption for the manufacturers. A residual business will keep supplying replacement airbag inflators before being wound down. Everything else Takata sold can now be bought from KSS. And partnering with KSS, rather than a big competitor like Autoliv, means carmakers retain more choice in suppliers.
This is a blot on corporate Japan to rival the stain from Toshiba, which is being demoted from the first section of the bourse and frantically selling its best business. Huge cost overruns in its U.S. nuclear subsidiary showed up Toshiba’s project-management failings; Takata’s failure has dented Japan’s reputation for technical excellence. In both cases, weak governance allowed problems to fester. Investors look foolish too. As recently as January, Takata’s market value exceeded $750 million despite looming liabilities.
This is a huge boost for KSS. It implies a dramatic increase in scale – the firm was bought by Ningbo Joyson for just $920 million last year. That a Chinese-owned entity would gain a foothold in Japan’s vaunted auto industry thanks to poor quality control was once hard to imagine. But crisis can spark change. It helps that KSS is American and run independently, and Takata has few friends left among carmakers.
The price looks reasonable. Suppose KSS only salvages half the revenues Takata made last year, as customers go elsewhere. At an 8 percent margin that would yield 26.5 billion yen of EBITDA, a Breakingviews calculation suggests. That implies a price of 6.6 times EBITDA, while Autoliv trades on 7.5 times forward EBITDA. Still, no one can blame KSS for wanting to drive safely.
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