In this piece, Bruce Flatt not only discusses the bottom-up strategy involved with Brookfield's acquisition of Clarios, but over time, the top-down ramifications of the business as well. Notice the emphasis on long-term thinking and the way Brookfield manages their debt. Reading Flatt's Letter to the Shareholders gives the individual investor insight into the thinking that goes on within the Brookfield machine...One last note...Consider the possibility of the cottage industries that could spring up around this Automotive Battery Technology especially in terms of suppliers that might feed on this market.
Clarios
In our
private equity business, we recently closed our acquisition of Clarios for
$13.2 billion. Clarios is the global leader in automotive battery
technology, manufacturing and distribution. The transaction was funded
with equity and debt on very favorable terms, given the exceptional
strength and stability of the business. We raised debt at a weighted
average cost of 5.9% and with an average term of seven years. There are
no financial maintenance covenants and there is no recourse other than to
Clarios. We are pleased with this outcome as it provides us with
significant flexibility to run the business and execute our plans, allowing for substantial
free cash flow to be distributed to owners.
Clarios
is a technology leader and an essential product supplier to an end market that
is constantly growing. As a global market
leader that supplies more than one third of the world’s automotive batteries,
Clarios benefits from economies of scale in product development, manufacturing
and recycling of used batteries. Clarios has remarkable stability in earnings,
as over 75% of sales are driven by inelastic, stable demand for aftermarket
battery replacement. As a result, Clarios boasts a decades-long record of
consistent growth in EBITDA and unit profitability throughout business cycles.
Over the
last 15 years, profitability has declined only once (in the financial recession
of 2009), but quickly rebounded the following year. The aftermarket
nature of the business also provides significant downside protection to our
investment as cars last an average of 15 years and require three battery
replacements. As a result, it would take a long time to displace or
significantly impact cashflows from the business, given the current number of
automobiles in the markets served by Clarios.
We
believe that favorable industry trends also provide significant growth
potential for the business. First,
the industry expects the total number of cars on the road to grow by 30%
globally over the next ten years. Clarios will provide batteries to the
manufacturers of these cars, as well as replacement batteries, for decades to
come. This is true even in a world where there is a higher take up of
electric cars, as today every electric or hybrid car also has a traditional 12-volt
battery that performs many of the same functions of an internal combustion
engine car. In addition, as vehicles are increasing in complexity, the
car battery is becoming even more critical in managing the increasing
electrical loads in automobiles. This is driving an industry shift
toward advanced batteries, where we believe our business is by far an industry
leader.
Clarios
also has long-term relationships with top-tier original equipment manufacturers
and auto retailers in more than 150 countries, which provides us with a unique
advantage in the development and supply of new products and technologies. The company has a history of innovation and has
invested in an international network of laboratories with over 300 engineers
focused on battery research and development to address our customers’ evolving
needs as they design the next generation of vehicles.
Finally,
as we do with all our businesses, we have identified opportunities within
manufacturing and supply chain processes to further support profitability, and
we are working closely with the management team on these and other initiatives
to enhance the business.
Bruce
Flatt,
Excerpt
from Brookfield
May 9,
2019
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