Dowlais Group plc (DWL) ORD GBP0.01

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The boards of Dowlais and American Axel Manufacturing (AAM) have recommended a cash and share merger which would result in AAM taking a controlling stake of about 51% of the enlarged entity.

The proposal represents a total implied value of 85.2p per Dowlais share, a premium of 25% to yesterday’s closing price. This comprises of 0.0863 AAM shares, a cash payment of 42p, and up to 2.8p in cash dividends. The deal would see Dowlais shareholders own about 49% stake of the new enlarged group.

The deal is expected to complete in 2025 subject to multiple conditions including Dowlais shareholder approval and sign off by several antitrust authorities.

The shares were up 9.2% in early trading.

Our view

Against a difficult trading backdrop, Dowlais’ management is recommending that the group scales up and drives efficiencies through a merger with its US competitor AAM. For 2025, progress towards deal completion is now likely to be the main driver of investor sentiment. If it falls through the focus will revert to business performance at Dowlais.

Dowlais’ revenue and profits have been falling due to weaker demand for electric vehicles. But at the last check, the rates of declines were holding better than the broader sector,

Its largest division, GKN Automotive, remains the driving force behind the group's performance. It produces drivetrain components, which are a group of parts that connect a car's engine to the wheels and other parts of the car.

The group's holds market-leading positions on many of these components. It serves around 90% of global car manufacturers, with the group's parts finding their way onto around half of these manufacturers’ cars. And because of the wide variety of car manufacturers this division works with, revenues are spread across multiple geographies. This helps to diversify some risk if certain markets slow down for any reason.

With the switch to electric vehicles (EVs) looking inevitable, we think Dowlais could be a major long-term beneficiary of the transition due to its market-leading positions in the EV space. 2023’s automotive orders climbed to record levels worth more than £6bn over the contract lifetimes, with a mammoth 74% of this being EV-related. However, that pace has slowed so far in 2024. With so much economic uncertainty hanging over the market, not every consumer is confident enough to sign the dotted line for a new car right now.

That means the timing of an upturn looks far from certain, and sentiment is likely to remain weak for the immediate future. Elsewhere, the group has made some impressive efficiency gains, but the dip in demand is putting cash flow under pressure. The dividend has been held for now but, with cash allocation priorities under review, there are some question marks around the viability of the 8.8% prospective forward dividend yield.

Ultimately, Dowlais has a strong market position and, in the long-run, we see the electric transition as a big tailwind for the group. However, such a big change was always likely to hit a speed bump. The current challenges are reflected by a valuation towards the bottom of the peer group, which has attracted the attention of a suitor.

The shares are trading below the value implied by the merger, indicative of the approvals still required to achieve completion. Investors who wait for the process to run its course will need to take a view on the prospects for the enlarged group whose shares would then be listed on the New York Stock Exchange and not the London Stock Exchange if the merger goes ahead.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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