What happened

Aerospace Automobile Electromechanical （AAE） announced plans to acquire a 51% stake in erae AMS（excluding businesses other than automobile heat-exchange system business） from erae cs Co., Ltd.（erae cs） and erae ns Co., Ltd. （erae ns） in cash. According to their agreement, AAE also has the right to acquireanother 19% stake in erae AMS from erae cs six months after the above deal closes:

According to the agreement, erae AMS’s businesses other than automobile heat-exchange system business will bespun off and erae AMS will retain the assets & liabilities of the automobile heat-exchange system business.

AAE will acquire a 42.30% stake in erae AMS from erae ns; it will also buy further 8.70% stake in erae AMS fromerae cs in cash. Within ten working days of the deal closing, Posco Daewoo will transfer its 7.70% stake in eraeAMS to erae cs.

AEE has the right to acquire another 19% stake in erae AMS from erae cs six months after the above deal closes.

The acquisition target is valued at US$288mn. According to agreement, the final acquisition price should be equivalentto “51% of US$288mn plus cash minus liabilities” on the day when the deal closes.

Comments

In 2011 and 2015, erae cs and erae ns acquired stakes in erae Automotive Systems （erae AMS）。 The major products oferae AMS’s automobile heat-exchange system business are HVAC systems, powertrain cooling systems andair-conditioner compressors. Thanks to its rich experience in heat-exchange system business and excellent ability inmodular design/production, erae AMS has received many orders from global clients and maintained long-termrelationships with them.

In March 2016, AAE completed the acquisition of Shanghai Delphi Automotive Air Conditioning Systems and changed itsname to SDAAC Automotive Air-Conditioning Systems. SDAAC and erae AMS are well-known automobile heat-exchangesystem producers and they have high market shares in China and South Korea, respectively. The acquisition priceimplies 15x 2016 P/E （including liabilities）。 SDAAC and erae AMS may produce synergies in the future and help AAEfurther strengthen its global presence. Maintain BUY rating.

Risks

The deal does not gain regulatory approval.