DEALTALK-A Visteon bid for Halla would face hurdles

Tue Aug 9, 2011 2:37pm EDT

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(For more Reuters DEALTALKs, click on DEALTALK/)

* Visteon's coveted Halla Climate stake in focus

* Shareholders have called for breakup of Visteon

* Full Visteon control of Halla seen a challenge

* Hedge fund's new board members may help swing pendulum

By Soyoung Kim

NEW YORK, Aug 9 (Reuters) - Visteon Corp (VC.N) may be pinning its hopes on a key South Korean asset as its ticket to staying independent.

But the strategy may not be enough to keep hedge fund investors who are pushing for a breakup or simpler corporate structure at bay.

The former parts affiliate of Ford Motor Co (F.N) has said its 70 percent stake in Halla Climate Control(018880.KS) is core of its climate control business and it would eventually like to buy the 30 percent of the Korean company it does not already own.

Any bid for full ownership of Halla, however, is likely to run into many hurdles, including almost certain opposition from Halla's top customer, Hyundai Motor Group, people familiar with the situation said.

Visteon has four different businesses -- climate control, interiors, electronics and lighting. Its Asian businesses, including Halla, are seen as the company's best assets, but it does not have full ownership of these assets either.

This complex corporate structure has led to calls for a breakup from shareholders that say the company has more value in pieces than as a whole. [ID:nN1E7670GX]

Hedge fund Alden Global Capital, one of many investors that took up positions during Visteon's bankruptcy, has succeeded in placing two directors on the company's board -- Harry Wilson and Kevin Dowd.

Both have a reputation for being restructuring specialists. Wilson was part of the White House's auto task force, leading the sweeping 2009 restructuring of General Motors (GM.N).

Taking full control of Halla, which makes air conditioning and heating for vehicles, and becoming a supplier centrally focused on climate control, could help the once-bankrupt company satisfy these investors clamoring for a simpler corporate structure.

But Hyundai Motor Group, which relies on Halla for 75 percent of its air-conditioning and heating system needs, would not want to see full ownership of Halla handed to a party outside its influence, the people familiar with the situation said.

"Hyundai will be uneasy about a potential full ownership of Halla Climate Control by a U.S. company," said Ko Tae-bong, an auto analyst at IBK Securities, in Seoul.

Bruised by years of shoring up ailing suppliers during the downturn to keep their own factories running, automakers are also reluctant to do business with indebted suppliers.

Halla is valued at just below $2.4 billion, nearly the same as Visteon, whose market cap has fallen to $2.75 billion amid broader market turmoil. Halla's 30 percent stake is worth more than $700 million, but the company's strong growth and profit outlook means buying full ownership would require a heavy premium.

"If Visteon has to pay a big premium to buy the rest 30 percent stake, that would require additional leverage either on Visteon's books or on Halla's books," one source said. "Hyundai is very uncomfortable with its suppliers levering up."

There are also several other potential suitors interested in owning Halla Climate, including the company's original founding partner, Halla Group, the sources said.

Halla Group, once one of Korea's largest conglomerates, founded Halla Climate in a joint venture with Ford in 1986 but had to sell it and other group companies as a result of the Asian financial crisis in the late 1990s.

Halla Group bought back one of its former group companies in 2008 -- Mando Corp (060980.KS), which is Hyundai's top parts supplier. It would also like to buy back Halla Climate and re-combine with Mando, the sources said, adding that family ties between Hyundai and Halla may leave little room for another party to jump in.

The ties run deep. Hyundai Motor Group Chairman Chung Mong-Koo is a cousin of Chung Mong-won, who runs Halla Group. Both inherited the empires founded by their fathers.

When JPMorgan (JPM.N) ran a sale process for Mando in 2008, Hyundai threw its weight behind Halla Group, helping it buy back the former unit for less than what rival bidders offered.

Representatives for Visteon, Hyundai and Halla Group declined to comment.

SMALL CHANGES?

Visteon could divest smaller, non-core businesses first, analysts say.

Lighting, for example, accounted for less than 10 percent of Visteon's sales last year and is seen as less attractive than its core climate control and interiors divisions.

Besides 70 percent of Halla, Visteon owns a 50 percent stake in Yanfeng Visteon Automotive Trim Systems, a Chinese supplier of interiors and seating. Chinese automaker SAIC Motor Corp (600104.SS) owns the other half.

Industrial conglomerate Johnson Controls (JCI.N) unsuccessfully bid for Visteon's Yanfeng stake in early 2010, when Visteon was in bankruptcy.

It remains to be seen if the addition of Alden's board members will swing the pendulum in favor of a bigger change or if Visteon will be able to hold its own.

"There will be pressure for Visteon to do something, particularly with the new board members," another source said. (Additional reporting by Jin Hyunjoo in Seoul; Editing by Paritosh Bansal and Steve Orlofsky)

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