Magna eyeing acquisitions in China and Russia

TORONTO – Auto parts maker Magna International Inc. is looking for acquisitions in Asia or Eastern Europe, after facing challenges at its South American operations.

Magna said it’s interested in snatching up a company with innovative technology that would allow it to grow in markets such as China, Russia and other parts of Asia and Eastern Europe.

“Certainly we will be and have looked at acquisitions to supplement our growth,” chief financial officer Vince Galifi told analysts Friday.

“A big focus is technology — what technologies are out there that could supplement what we have, complement what we have, advance what we have. We are also looking at acquisitions that could assist us to grow faster in markets that are a priority to us.”

The auto parts manufacturer is taking a more cautious approach to growth in India and South America.

The company said it lost “tens of millions” of dollars on its operations in South America, partly due to high inflation.

Magna, which owns seating companies in Argentina and Brazil, is having issues getting parts in and out of the country, paying for rising labour costs and convincing customers to pay for the inflation-related price increases.

“It is an uphill battle so I don’t see us being aggressive in growing our business in a big way in Brazil and Argentina until we have got a good handle on what we are doing down there,” Walker said.

“But we are certainly making headway, especially in the operational issues.”

Canaccord Genuity analyst David Tyerman said many of the issues, such as problems importing parts, are outside of Magna’s control.

“It’s not going to derail Magna,” Tyerman said.

“But it sounds like it’s going to be this little irritant on the sidelines for a while. What they’ve concluded is that South America isn’t as attractive an emerging market as Asia.”

Magna is having a tough time finding ways to spend all of the excess cash on its balance sheet, Tyerman said.

“We’ve all heard our old Bank of Canada governor slamming companies for keeping too much cash around and not investing,” Tyerman said. “Well Magna’s exhibit A.”

The company’s first priority has been to build new plants, but that hasn’t been enough to use up all of the cash, Tyerman said. They have also upped their dividend in the past and used the money to buy back stock.

A large acquisition could eat up a lot of cash, but the company has had a tough time finding one that suits their needs, bringing together new technologies while expanding their footprint in emerging markets in Asia.

The company, based in Aurora, Ont., beat analyst expectations in the second quarter as it managed to repair some of the operational issues at its European facilities and outperform the market there and raised its sales outlook for the year.

Magna said Friday it currently expects between $33.3 billion and $34.7 billion of sales in 2013 compared with its expectations in May for sales between $32.6 billion and $34 billion.

During the three months ended June 30, Magna’s sales rose to US$8.96 billion, up from $7.72 billion a year earlier and a Magna record for the second quarter.

Profit also grew, rising to US$415 million $1.78 per diluted share from $349 million or $1.48 per share a year ago.

The average analyst estimates according to Thomson Reuters had been for sales of $8.795 billion, $1.70 per share of net income and $1.63 per share of adjusted earnings.

Magna, which reports in U.S. currency, said its production sales in Europe were up 14 per cent from the same quarter last year, even though overall European vehicle production was down by one per cent.

The profitability of Magna’s European operations tumbled a few years ago, as the company inaccurately estimated the cost of new projects and struggled with issues at some of its plants, Tyerman said.

“Part of the story for Magna going forward is to fix those problems,” Tyerman said. “In the quarter they made some decent progress on that.”

North America accounted for $4.59 billion of sales during the quarter, while Europe contributed $3.76 billion. The rest of the world accounted for $609 million.

Complete vehicle assembly sales increased 23 per cent to $796 million in the quarter while complete vehicle assembly volumes increased 17 per cent to approximately 39,000 units.

Magna shares closed up $2.15, or 2.68 per cent, to $82.30 on the Toronto Stock Exchange on Friday.

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