Friday, April 1, 2011

Amerigon ( Nasdaq - ARGN ) -- Makes Acquisition Bid

Amerigon (ARGN $15.25) launched a friendly acquisition bid for German competitor W.E.T.  The target is a leading producer of heated auto seats, with especially strong distribution in Europe.  Revenues were $311 million in 2010.  Amerigon hopes to complete the transaction by paying $167 million, financed with a still undetermined combination of stock and debt.  The company has an agreement with holders of 76% of W.E.T.'s shares, but needs 95% altogether to proceed.  Antitrust clearance is required, as well.  If the deal goes through Amerigon's annualized earnings could benefit right away by $.25-$.50 a share, excluding one time expenses.  Financial leverage also would jump sharply, suggesting a lower P/E multiple might obtain in the short run.  If stock isn't used in the deal chances are Amerigon will tap the equity market at some point to restore a better balance to its capital structure.  The transaction offers tremendous potential from a sales standpoint.  Margins on W.E.T.'s heated seats are lower than what Amerigon earns on its air conditioned car seats.  But those could rise if the European automakers W.E.T. serves begin to adopt the American technology.  Operational efficiencies are possible, too.

Meantime, Amerigon's own results have stalled.  Q1 sales are likely to increase by a modest amount compared to the year ago period.  Costs remain elevated, particularly for tellurium, the key material in Amerigon's cooled seats.  R&D costs are pointed higher, as well.  Earnings may improve year to year, but a sequential decline appears likely.  Full year earnings are likely to approximate the 2010 figure, excluding any contribution from W.E.T.  Longer term, income could accelerate if the merger is consummated and the car market keeps rebounding.  Non-GAAP earnings in 2012 could attain $.75-$1.00 a share (please refer to "Accounting Notes") and set the stage for additional gains beyond.  Our advice is to wait for the acquisition process to play itself out.  Failure to complete the deal could result in a significant share price decline.  Upside from a positive resolution appears limited at the current valuation.

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