Analysts lukewarm to Allison ahead of market debut

March 14, 2012

Shares of Allison Transmission Holdings Inc. are expected to begin trading Thursday, but the early reaction to the initial public offering from analysts is lukewarm.

The Indianapolis-based company’s private-equity owners are offering 21.7 million shares for $22 to $24 apiece, which could raise as much as $522 million. Shares will trade on the New York Stock Exchange under the symbol ALSN.

The midpoint of that estimated price range would give Allison a market value of $4.2 billion, compared with a $1.53 billion equity value when Carlyle Group LP and Onex Corp. bought the company from General Motors Corp. in 2007. All the proceeds of the sale will go to Carlyle and Onex instead of reducing the company's heavy debt load.

The company took on $4.2 billion of debt in connection with the buyout and still carries about $3.4 billion, it said in its filing. Moody’s Investors Service raised its rating on Allison’s secured bank credit facilities to Ba3 from B1, saying in a March 8 statement it expected “modest revenue growth over the near term.”

The IPO would make Indianapolis-based Allison twice as expensive as former GM units Delphi Automotive Plc and Remy International Inc., based on last year’s earnings, just as analysts predict slowing growth in U.S. truck sales. While Allison’s profit more than tripled in 2011, the IPO price leaves little room for further gains, said Peter Sorrentino of Huntington Asset Advisors in Cincinnati.

“That’s a stiff valuation for a company that probably will struggle to deliver a whole lot more to the upside,” said Sorrentino, who helps oversee $14.6 billion as a senior portfolio manager. “We’ve had a pretty decent rebound in terms of vehicle demand and in transportation equipment, so it’s a little late in the cycle to be paying a premium.”

Allison’s value including debt would be several times higher than other transportation-components firms.

Including net debt, Allison would be valued at $7.2 billion at the midpoint of its price range, or about 11 times last year’s earnings before interest, taxes, depreciation and amortization.

Delphi, the car-parts maker that went public last year, has an enterprise value-to-EBITDA multiple of about 5.5, data compiled by Bloomberg show.

Remy International Inc., the former GM motors unit that exited bankruptcy in 2007, has an enterprise value of about 5.4 times EBITDA, the data show.

Eaton Corp., a Cleveland-based company that Allison names as a competitor, has an enterprise value of $19.5 billion, or about 8.9 times EBITDA of $2.2 billion in the past 12 months.

As the leading supplier of automatic transmissions for heavy trucks and buses, Allison benefited from a surge in vehicle sales last year, reporting net income of $103 million.

Morningstar Inc. analysts are cautious in their outlook for future sales.

Bloomberg Industries projects sales growth slowing from 54 percent last year to 14 percent this year. Growth may shrink further to 3.1 percent from 2013 to 2014, Allison said in its prospectus, citing ACT Research.

“I have a little more reservation about what the next two years might look like,” Morningstar analyst Basili Alukos said. He projects annual sales growth of 6 percent for this year and 2013.

“We’re at normalized demand right now,” Alukos said. “We don’t expect a huge surge."

Melissa Sauer, a spokeswoman for Allison, declined to comment on the IPO. A spokesperson for Toronto-based Onex didn’t return a phone call seeking comment. Chris Ullman, a spokesman at Washington-based Carlyle, declined to comment.

Carlyle and Onex bought Allison at the tail end of a private-equity buying spree from 2005 to 2007, when about $1.6 trillion in leveraged buyouts were completed, according to Preqin Ltd., a London-based research firm. Private-equity firms are facing pressure from clients to sell holdings and return capital after economic concerns prevented them from exiting investments during the second half of 2011. Carlyle is also raising funds as it pursues its own public offering.

“They probably got it well before the bottom in terms of valuation, so they’re trying to wring all the value they can out of it,” said Kevin Tynan, a Bloomberg Industries analyst based in Princeton, N.J.

Allison has benefited from a surge in truck sales, reporting earnings of $103 million last year after returning to profit in 2010. Allison got 34 percent of its 2011 revenue, or $727 million, from parts for on-highway vehicles in North America, the filing shows.

Growth in North American sales of vehicles from delivery vans to 18-wheelers jumped 54 percent in 2011 and may slow to a 14-percent rate this year, according to Bloomberg Industries. Growth may shrink further to 3.1 percent from 2013 to 2014, Allison said in its prospectus, citing ACT Research.

Allison says it has 62 percent of the global market for medium- and heavy-duty trucks driven on highways. It’s also the market leader in North America for school buses and hybrid transit buses, and the top supplier of transmissions to the U.S. military, according to its filing. The company’s CEO, Lawrence Dewey, has worked at the company since 1989.

Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. are leading the offering. Allison traces its roots to Jim Allison, who was a co-founder of Indianapolis Motor Speedway, home of the Indianapolis 500 auto race, a track built to test race car parts. GM bought the company in 1929 after Allison’s death.




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