Delphi tapping credit line puts sale to BorgWarner at risk

(Reuters) - U.S. auto parts company BorgWarner Inc BWA.N threatened to walk away from a $951 million deal to buy Delphi Technologies DLPH.N on Tuesday, after the automotive equipment supplier drew down on a credit line without its acquirer's approval.

Delphi tapped its $500 million revolving credit facility to help it weather the hit from the coronavirus pandemic, the company said in a statement. BorgWarner said the move breached their deal terms, and gave Delphi 30 days to “cure” the issue.

Delphi responded that BorgWarner had “unreasonably withheld its consent,” but added it intended to negotiate to find a solution. The companies announced their deal in January, and said at the time they expected it to close in the second half of 2020.

Delphi shares ended trading on Tuesday in New York down 22% at $8.05, a steep discount to the $11.04 per share in BorgWarner stock that Delphi shareholders would stand to receive, reflecting investor concerns that the deal will be not be completed.

BorgWarner’s threat also sent ripples across the corporate world, as dealmakers pondered whether other companies would cite the use of credit lines in the wake of the coronavirus pandemic as grounds for walking away from acquisitions they would otherwise be contractually obligated to complete.

“It is going to be hard in this environment for a buyer to claim a (material adverse event), so you are likely to see buyers look to other conditions to see if there are other representations that are no longer true and correct,” said Paul Tiger, a partner at law firm Freshfields Bruckhaus Deringer. Tiger specializes in mergers and acquisitions and was not involved in the Delphi deal.

Merger agreements typically allow a buyer to walk away from deals only if they can show that the acquisition target has been disproportionally affected by a calamity compared to its peers in the period between signing and closing -- a high legal standard to meet in court.

The Delphi case, however, shows how a reluctant acquirer can seize on the use of the acquisition target’s credit lines during a moment of crisis. Many companies are currently drawing down or upsizing their loan facilities, as the market rout triggered by the coronavirus pandemic fuels fears about a potential liquidity crunch.

“It would not surprise me that there will be remorseful buyers looking to get out of contracts,” Tiger said.

BorgWarner and Delphi specialize in auto transmissions. BorgWarner, the larger of the two with annual revenue of more than $10 billion, has been expanding its products for electric vehicles.

Reporting by Rebecca Spalding in New York and Sanjana Shivdas in Bengaluru; Editing by Anil D’Silva and Jane Wardell