Novice Investing - Magna Bid For Opel

Date: Thursday 02nd 2010f September 2010 12:16:33 PM

Magna Bid For Opel - 05/31/2009

By: Novice Investing Staff

		Magna International Inc. 337 Magna Drive Aurora, ON L4G 7K1 Canada

With the US in the worst economic recession since great depression, it hurts Magna International Inc. (MGA) as major auto supplier more than other industries. When we last discussed about Magna, shares was trading at 3 year low of $ 58 per share. This quarter brought the bankruptcy of two American icons, Chrysler and General Motor which accounts for 22% of Magna's revenue.

Lately, Magna shares has traded at around $ 32 per share, down from $ 58 per share last summer, however up significantly from its nadir of $ 20 per share. This past weekend brought an astonishing sale of GM Opel unit to Magna, Russian-based Sberbank with a combined 55% stake of Opel. GM and Opel employees owned the rest of the company. As part of the deal, German government agrees to provide $ 2.11 Billion of bridge loan financing to Opel.

Magna, meanwhile indicated that it needs to cut 10,000 jobs in Opel across Europe. While Magna seemed to be buying Opel on the cheap, the company still encounters many obstacles with the shrinking auto market in Europe. The US auto market has shrinked from 15 Million to 9.5 Million vehicles annually. European economies which is set to perform worse than the US, will have similar impact on its car sales. While most European prefer smaller cars than Americans, gasoline price is far higher in Europe than in US. As a result, economic recession such as now will dent European car market in the medium term.

So, what motivates Magna to purchase Opel? One is the struggle of General Motor and Chrysler in the US home market. While both companies continue to operate during the bankruptcy proceeding, for the past few decades, Japanese competitors have been taking away their market share. With 22% of Magna's revenue dependent upon these two companies, it needs to diversify away from US auto market for a while. Buying Opel will enable Magna to do just that. Further, with the backing of Sberbank, Magna can tap the potential of burgeoning Russia's auto market.

In the current economic condition, is it prudent for Magna to make a large acquisition such as this one? Latest Magna's balance sheet shows that it still has a solid cushion with $ 2.75 Billion (or $ 24.56 per share) of positive net cash or 77% of its total market capitalization. Magna is expected to lose $ 3.54 per share this year. Even if the auto market stays down for the next five years, Magna's $ 24.56 per share of net cash is more than adequate to let it muster the downturn.In the past, Magna can earn up to $ 7.00 per share selling auto parts to auto companies. Now, having to sell the car itself, we feel that Magna can earn more than that. Let's hope so since Magna is one of our sample portfolio pick a while back.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Magna International Inc. (MGA) or any other securities.

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