Suitors circle for Takata sale talks

Takata Corp has honed in on bids from Autoliv Inc and Key Safety Systems Inc, as the air bag maker behind the biggest auto safety recall ever progresses toward the final round of negotiating a sale, said people familiar with the matter.

The two bidders gained an edge because both have technical expertise in air bag systems and safety equipment, and because carmakers view them as able to lower costs and improve the quality of Takata parts, said two people, who all asked not to be identified discussing the negotiations. Takata is working to find a buyer and finalize its restructuring plan by year's end, the company said this month.

Takata had three other bidders make it to the most recent round of its sale process: private equity firm KKR & Co; Bain Capital and Daicel Corp of Japan in a joint pitch; and auto-parts suppler Flex-N-Gate Corp. The sale process has been described as fluid, given the complex nature of Takata's litigation, and any of the bidders could come back. Flex-N-Gate has a record of integrating acquisitions and could still return with a winning bid, especially if there were antitrust concerns with another suitor, one of the people said.

The eventual winner faces years of replacing Takata air bags linked to at least 17 deaths and more than 100 injuries. The buyer will potentially be on the hook for recall costs and other liabilities while having to ensure a stable supply of replacement parts to automakers. Regulators have ordered recalls scheduled through at least 2019 that could eventually exceed 100 million air bags used by more than a dozen automakers, including Honda Motor Co, Volkswagen AG and General Motors Co.

Bidders' strengths

Carmakers prefer Autoliv because it's larger and has more resources to handle the recall, one of the people said. Key Safety, which is owned by China's Ningbo Joyson Electronic Corp, makes air-bag inflators and has the kind of expertise that could make a deal work. A deal could still lead to Takata seeking some form of bankruptcy protection in the US, an option proposed by all bidders, people familiar with the discussions said in October.

Chad Tendler, an outside spokesman working for Key Safety, and Autoliv spokesman Thomas Jonsson declined to comment. Jared Levy, an outside spokesman for Takata, also declined to comment.

Antitrust scrutiny may be one potential obstacle to Autoliv because it's already the world's largest air bag maker and would end up with more than half the global market share, according to people with knowledge of the talks. Key Safety is the fourth-largest air bag maker and would jump to No 2, according to Valient Market Research. For Key Safety, a win could help it earn business from Japanese automakers.

Carmakers' interests

Automakers have expressed their preference for a manufacturer with a track record of quality control and operations in major markets over buyout firms, because of concerns that financial investors will focus on short-term returns over offering a long-term solution to the global air bag supply, people familiar with the talks have said.

Takata hired Lazard Ltd as its financial adviser and the law firm Weil, Gotshal & Manges LLP to help weigh options, including bankruptcy or sale.

Takata has lost more than 60 percent of its market capitalization since the start of November 2015, dropping its value to about 44.4 billion yen ($399 million). The shares rose by 80 yen to 534 yen on Monday in Tokyo.

To fund the recalls, Takata has sold all of its holdings in Japanese automakers including Honda and Toyota Motor Corp. It also sold its Irvin Automotive Inc interiors unit to closely held supplier Piston Group.

Of Takata's 718 billion yen in sales during its last fiscal year, 36 percent came from air bags. The company also supplies seat belts, steering wheels, electronics, seat covers and head and arm rests. The cost of recalling all non-desiccated air bag inflators will be 1.28 trillion yen, Takaki Nakanishi, an analyst for Jefferies Group LLC, said in a report published in May.

Death toll

The death toll is still rising after the first victim from Takata's flawed air bags was killed in 2008. One of the most recent victims is a 50-year-old woman in a Civic compact car, who was killed on Sept 30 in Riverside County in California. Almost all Takata-related deaths have occurred in Honda-built vehicles with air bags that can rupture and spray shards at vehicle occupants.

At the center of Takata's quality crisis is the use of ammonium nitrate as its air-bag inflator propellant, a chemical that other inflator makers don't use. The recalls would phase out the use of ammonium nitrate as a propellant.

Bloomberg