Lucas, Varity to Create a Global Auto Parts Firm

DETROIT —  In a deal that illustrates a global consolidation reshaping the huge but obscure auto parts business, two of the industry’s biggest players announced a $4.9-billion merger deal Friday that would create the world’s eighth-largest auto parts firm.

The stock swap between Lucas Industries, a Britain-based auto and aerospace giant, and Varity Corp., a diversified auto parts maker in Buffalo, N.Y., formerly known as Massey-Ferguson, would create a transatlantic powerhouse in brakes, diesel engines and aerospace.

“By completing this merger and becoming one company, Varity and Lucas will achieve a shared vision of being a global force in our markets,” said Victor Rice, Varity’s chief executive.

Rice would be chief executive of the new concern, but the merged entity--LucasVarity--would be based in London, with 62% controlled by Lucas shareholders.

The deal is the latest in a shakeout roiling the auto supply industry. As auto makers become increasingly global, they are standardizing parts used in cars throughout the world. They are also using fewer suppliers in an effort to simplify operations and reduce costs.

As the same time, auto makers such as General Motors Corp., Toyota and Volkswagen want suppliers to provide integrated systems rather than individual parts. For instance, they want a completed seat that requires no assembly of the frame, fabric and other components.

These pressures are prompting a consolidation as suppliers are forced to expand globally with auto makers and keep pace with the necessary expertise and financing.

The worldwide auto parts industry has annual revenues in excess of $500 billion, according to the Economist Intelligence Unit in London. It is estimated that the number of suppliers could shrink from about 5,000 today to 2,000 in five years.

Some analysts predict that the number of first-tier suppliers--the largest companies that build integrated component systems for auto makers--could shrink to as few as 20 in the next 10 years. The top six are Delphi Automotive, a General Motors unit; Nippondenso of Japan; Germany’s Bosch; and tire makers Michelin, Bridgestone and Goodyear.

The consolidation has been underway for several years but has gained ground in 1996. Earlier this month, Lear Corp., a major auto seat supplier, announced the acquisition of auto carpet maker Masland Corp. for $384 million.

Also this year, aluminum wheel maker Motor Wheel Corp. bought Hayes Wheels International for $560 million. And Germany’s Robert Bosch bought the brake manufacturing operations of AlliedSignal Inc. for $1.5 billion.

“We will see more of these transactions this year,” said Craig Cather, president of CMS Inc., an auto supply consultant. “Some will be acquisitions, some will be mergers, and some will be joint ventures.”

The proposed Lucas-Varity marriage is seen as a good fit because the two are strong in different geographic and technological areas. “This was a strategic merger that makes sense for both sides,” said David Andrea, analyst for Roney & Co. in Detroit.

Varity is a leader in anti-lock brake systems in North America, a market where Lucas does not have much of a presence. However, Lucas is strong in disc brakes in Europe and the Pacific Rim, where Varity has not made major inroads.

“I don’t believe you can compete in the auto parts business unless you’re a global supplier,” Rice said.

Company executives said the merger should save $100 million annually in operating costs and another $100 million a year in taxes for three years. Combined, the companies had revenue of $6.7 billion and operating profit of $465 million last year. The market capitalization of the new entity is $4.9 billion.

Layoffs are expected among the firm’s 55,000 workers, although executives would provide no specific numbers.

Lucas Chief Executive George Simpson would leave to head the British electrical and defense industry conglomerate General Electric by the end of the year. Lucas Chairman Brian Pease would assume the same title for the new company.

Although the transaction is being described as a merger, Lucas shareholders would own 62% of the new company. The deal requires the approval of regulators and shareholders in both countries.