ArvinMeritor faces hurdles in Dana bid

ArvinMeritor Inc.'s bid for a $2.2 billion hostile takeover of Dana Corp. faces a number of hurdles that threaten the plan to create a blockbuster automotive parts supplier, according to analysts quoted in a Reuters story. ArvinMeritor last Wednesday launched a hostile cash tender of $15 a share for Dana. The tie-up would create the third largest U.S. auto parts maker behind Delphi Corp. and Visteon Corp. Potential obstacles include a poison pill, Dana management's commitment to turning around the company's flagging fortunes through a massive restructuring, and a problematic capital structure that would leave the combined company heavily burdened with debt, analysts said. Antitrust concerns also loom, due to the two companies' dominance in producing certain commercial truck parts. "We believe Dana will fight tooth and nail to remain independent," Merrill Lynch analyst John Casesa wrote in a research report. Dana has closed 28 plants, divested $600 million in noncore operations and cut its work force by almost 15 percent in a bid to restore profit and focus on key products such as axles, driveshafts, frames, brakes and chassis. Dana, which celebrates its 100th anniversary in 2004, has already rejected a $14 a share offer from ArvinMeritor. "Dana does not appear to be at all interested in selling out," said UBS analyst Robert Hinchliffe in a report. "Chairman and CEO Joe Magliochetti has staked his legacy on the outcome of the current restructuring plan and might not view a sale of the company as an attractive outcome." Dana said it would respond to the tender within 10 business days and urged shareholders to defer any decisions until then. Analysts believe ArvinMeritor will have to raise its bid to the $18 to $20 range, where Dana management has said it values the company. The stock was at $15.88 on Friday afternoon. ArvinMeritor plans to finance the deal through bank loans, a revolving credit line and a high-yield bond issue. Troubling to many analysts is the stratospheric debt-to-capital ratio of a merged Dana-ArvinMeritor. At more than 85 percent, it would be the second highest among suppliers. The combination of historically low interest rates and a greater investor appetite for high-yield issues makes such a deal possible, analysts said. Indeed, many believe complementary product lines, especially in chassis for passenger cars, make the merger a good strategic fit. But difficult industry conditions that include severe cost-reduction pressures, Big 3 market share losses and an uncertain outlook for consumer demand could restrict cash flow over the near term, analysts said. "The challenges in the industry are even greater than they were in the past, and that makes an acquisition of this size risky," said Martin King of Standard & Poor's Ratings Services, which warned it may downgrade both companies' credit ratings. Some see the truck market as the companies' most promising area for growth, but both hold large market shares in axles, driveshafts and brakes, which regulators will scrutinize. The merger becomes less attractive, analysts said, if regulators force the sale of any profitable business lines. To satisfy lenders, ArvinMeritor would likely have to raise additional equity, as it has indicated a willingness to do, diluting the deal's benefits, analysts said. Perhaps the biggest challenge to a takeover is Dana's poison pill, which is triggered when a suitor acquires 15 percent of Dana's common stock and works by flooding the market with more shares, making an acquisition potentially too costly. Dana's incorporation in Virginia, whose statutes make it difficult to call special meetings, presents another hurdle.