Delphi Spins Off Engine Unit -- 2nd Update

By Chester Dawson Features Dow Jones Newswires

Automotive supplier Delphi Automotive PLC will spin off its engine-components unit into a separate company, a move designed to allow the remaining company to focus on an advanced electronics business that could be a big player in the race to develop self-driving cars.

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The move, announced Wednesday and expected to be completed by next March, comes as Delphi is trying to keep pace with Silicon Valley companies and other tech firms edging into the auto industry.

"More technology is coming into cars," Kevin Clark, Delphi's chief executive, said in an interview. "If we don't make decisions, [if] we don't do things, in pretty short order given the pace of change in this industry, we won't be relevant."

The engine business will become its own publicly traded entity, potentially making Delphi's separate electronics business more attractive at a time when other automotive companies have been acquired by tech giants willing to pay big premiums.

The announcement comes shortly after Intel Corp. agreed to pay $15.3 billion for Mobileye NV, an Israeli car-camera pioneer selling to most auto makers looking to develop autopilot features. The deal's price tag is roughly equivalent to the market capitalization of Fiat Chrysler Automobiles NV.

Samsung recently completed its $8 billion deal to buy Harman International Industries Inc., a one-time giant in car audio that expanded by boosting its in-vehicle connectivity and telematics software and parts.

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Mr. Clark estimates Delphi's advanced electronics business accounts for about 75% of Delphi's current market capitalization and is therefore worth around $17 billion based solely on current revenue. "If you applied a [ownership] control premium to that, it's a pretty, a very big transaction in this space," he said.

The company, which is based in Britain for tax purposes but is run from its headquarters outside Detroit, has diverted more of its spending away from traditional components into high-tech applications geared for next-generation vehicles.

Last month, Delphi invested in a trio of high-tech startups to bolster its ability to harness diagnostic and other data in vehicles and provide a more interactive experience for drivers, as well as open potential avenues to market services to them.

Delphi's $12 billion advanced electronics business is its top revenue generator and employs about 145,000 people globally. Its $4.5 billion engine, or powertrain, business employs about 20,000 employees around the world.

The split is designed to allow the stock market to assign different valuations to the two parts of the company. The board's decision was driven in part by shareholder concerns over lower profit potential from its investments in the hardware-heavy engine-components business compared with the software-focused advanced electronics unit.

Investors reacted positively to the news, sending Delphi's stock price surging about 10% higher in afternoon trading on the New York Stock Exchange.

Delphi's CEO declined to comment when asked by an analyst on a conference call early Wednesday about speculation it has held discussions with German rival Continental AG about combining the two companies' powertrain businesses. A representative for Continental in the U.S. had no immediate comment.

The planned spin off doesn't mean Delphi is no longer interested in doing a deal with a motivated buyer. "Does that preclude somebody approaching us regarding that powertrain business? No," Mr. Clark told The Wall Street Journal.

Delphi's engine-centered components business has long been at the core of the company, which itself was spun off from General Motors Co. in 1999. The new powertrain company will focus on boosting performance of standard gasoline engines and developing new engine technologies, including some parts for electric vehicles but not the wiring. It will be run by a new management team led by two veteran Delphi executives.

Delphi also reported Wednesday that first-quarter net income from continuing operations rose 4.5% to $335 million, or $1.24 a share, from the year-ago period. Its revenue increased 6% to $4.3 billion.

The company is reviewing the names of both the spinoff and the remaining business, hinting one will abandon the iconic Delphi name. "It's a question of where that sits better -- within what will be the powertrain business, or the remaining business," he said.

Write to Chester Dawson at chester.dawson@wsj.com

(END) Dow Jones Newswires

May 03, 2017 15:29 ET (19:29 GMT)