Revved up for motor contracts

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The Independent Online
Conglomerates and acquisition-led growth have become dirty words for investors in the 1990s. But, in fragmented and fast-changing industries, acquisitive and focused quoted groups, with strong institutional support, can still deliver great results.

An excellent example is the motor components group Mayflower Corporation, whose record makes it one of the most remarkable UK growth stories of the 1990s. Almost from a standing start, the "shell" company, Triangle Trust, became a sizeable supplier of automotive parts; sales and profits are expected to reach pounds 400m and pounds 40m respectively next year. Chief executive John Simpson says he is in talks with large car makers about new deals. Those announced over the next 12 months will affect results in 1998 and 1999, so shareholders can expect plenty of good news.

Back in 1989, Triangle, then a loss-making toy company, included two motor businesses. The toy side was sold, along with one motor unit. The business remaining was a supplier of webbing for car seatbelts; it now shows profits of about pounds 1m a year.

Equity issues have played a key role in the build-up since. In 1991, car body maker, Motor Panels, and its US division, Motor Panels Inc, were bought for pounds 18m. This was followed by the pounds 3m purchase from the receivers of automotive design business, IAD, making up Mayflower Vehicle Systems (MVS).

In 1995, Walter Alexander, a company making bus body shells, was acquired for pounds 28m as part of a diversification strategy. The measure of Mr Simpson's ambitions was noted earlier this year, when Mayflower was outbid by US giant Tenneco on the planned pounds 172m acquisition of Clevite, a manufacturer of suspension products. Then Mayflower had the sense to walk away rather than get involved in a Dutch auction.

Mr Simpson has his ears to the ground, however, and quickly snapped up SCSM in the US for pounds 83m last month. The firm is a major supplier of metal pressings and body sub-assemblies and is now being merged into MVS.

The latest deal has been funded by a mixture of cash and equity, at 126p per share, leaving borrowings at 80 per cent of shareholders' funds. But strong cash generation is expected to bring this down to 40 per cent next year. In total, the group has raised about pounds 67m of new equity but is valued at pounds 358m, so Mr Simpson has so far created more than pounds 5 of value for every pounds l raised.

The group's strategy is aimed at exploiting two trends in the car industry. First is the proliferation of different car body shapes as consumers opt for ever more specialised vehicles. Second, manufacturers are contracting out many in-house activities to cut costs. Companies such as Mayflower have, therefore, had the chance to build an international capability as lowest-cost producers of parts and complete bodies to the big manufacturers.

A particular triumph has been Rover's revival of the MG sports car, where Mayflower invested pounds 28m and is sharing in the profits from supplying complete car bodies. For the Land Rover Discovery, MVS supplies body parts in crates for assembly.

Future partnerships include work on the next generation of Rolls-Royce cars and, in the US, a new sports car for Mercedes-Benz. Other US projects include truck cabs for Mack, complete car bodies for Chrysler's Prowler sports car and bodywork for a new Ford truck, the Aeromax. SCSM also works for General Motors.

Mayflower's partnerships read like a Who's Who of global car makers, leaving it well placed to win work as development proceeds. About half of sales and profits are set to come from the US. Roughly, pounds 33m of next year's profits will come from bodies and body engineering, pounds 7m from Walter Alexander, and pounds 1m from car seat belts.

Mr Simpson is also prepared to move into related automotive areas. The future may hold even bigger deals as complete body production is contracted out by makers.