
So my editor put the assignment on my desk- write about Aptiv(APTV)’s announcement of its plan to spin off its Electrical Distribution Systems business. It seemed boring and straightforward enough. Nothing was ringing a bell and I started to doze off at the thought of Electrical Distribution Systems. Based in SCHAFFHAUSEN, Switzerland- is that even a real place? Nothing. Boy, was I embarrassed when 15 seconds of googling revealed that Aptiv was in fact an old friend at the center of a decades-long web of stock spinoffs and we had even written about its birth in 2017 when it completed the spinoff of Delphi Automotive and took on the name Aptiv.
Now from here, I’m not sure where to go, because the story goes in both directions. Do I tell you where Delphi came from, before Aptiv, or do I tell you where Delphi Automotive went after? I guess I might as well start from the beginning. You see, in the early days of the auto industry, a visionary named William Durant created a company called General Motors(GM) and used it as a vehicle to roll up multiple automobile manufacturers, including Buick, Cadillac and Oldsmobile. Separately, Durant founded United Motors, which acquired multiple automobile parts manufacturers. He placed Alfred Sloan in charge of United Motors. In 1918, GM acquired United Motors, and Sloan was named as CEO of GM in 1920 after large shareholder Pierre S. du Pont forced Durant out.
Many things happened in the ensuing decades, but, for our purposes(with one exception we will come back to later), the next significant event was GM’s 1999 spinoff of its parts division as Delphi Automotive Systems Corporation. In many ways, this spinoff was a reversal of the company’s long history of vertical integration, and in particular, of the 1920 merger of GM and United Motors.
Delphi struggled as an independent company and filed for bankruptcy in October 2005. It would be four years before Delphi exited bankruptcy in October 2009, selling some divisions back to GM with others becoming an independent company under private ownership. GM had spent a great deal keeping Delphi afloat during its bankruptcy and had itself filed bankruptcy during the 2009 fiscal crisis. It finally completely extricated itself from Delphi in 2011. In November 2011, Delphi went public again.
Which brings us to what we mentioned earlier: in 2017, Delphi spun off Delphi Technologies and renamed itself Aptiv. In October 2020 BorgWarner(BWA) acquired Delphi Technologies, only to spin it off with some related businesses just 3 years later. We never wrote about BorgWarner’s July 2023 spinoff of PHINIA(PHIN).
And now that we have sufficiently buried the lede, here it is: Aptiv is now ready to fulfill its own destiny and pursue its own spinoff. Aptiv is pursuing the spinoff of EDS, which is expected to be tax free, and is targeting completion by March 31, 2026. Aptiv, post-spinoff will have significant scale and excellent profitability:
Following the separation, Aptiv – comprising Advanced Safety & User Experience and the Engineered Components Group – will offer a full sensor-to-cloud technology stack, including industry-leading open-architected ADAS and in-cabin user experience software platforms, and a broad range of interconnects and components that optimize the distribution of signal, power, and data for next-generation applications across diverse end markets, including aerospace and defense, telecommunications, automotive and commercial vehicle, and industrial. Aptiv’s portfolio of advanced software, hardware, compute, and interconnect solutions is in the sweet spot of long-term secular trends that include advanced safety, electrification, digitalization, artificial intelligence, and automation.
The pro forma Aptiv is expected to be a high growth, high margin company with robust cash flows to support organic and inorganic investments in advanced products and technologies across diverse end markets, as well as return excess capital to shareholders. In the medium term, Aptiv is targeting mid-to-high single digit revenue growth, low-to-mid teens U.S. GAAP operating income margins, high-teens-to-low-twenties Adjusted EBITDA margins, and significant free cash flow for the company. The Company estimates that Aptiv had $12.1 billion in revenues, including intercompany sales to EDS that are currently eliminated in consolidation, $1.4 billion in U.S. GAAP operating income, and $2.3 billion in Adjusted EBITDA for 2024, excluding the EDS business to be separated.
EDS will be smaller and slower growth, and with much smaller margins:
EDS’s differentiated design and development capabilities enable the optimization of vehicle architecture systems and thereby reduce vehicle weight, mass, and costs for OEM customers. EDS’s full range of low voltage and high voltage power, signal, and data distribution solutions uniquely position the business to enable the increasing demand for feature rich, higher contented vehicles that require optimized vehicle architectures, including electric vehicles (“EV”). As EV penetration continues to outpace the growth in global vehicle production, EVs represent a key growth market for EDS.
In the medium term, Aptiv is targeting pro forma EDS to generate mid-single digit revenue growth, mid-to-high single digit GAAP operating income margins, high-single to low-double digit Adjusted EBITDA margins, and solid free cash flow. The Company estimates that EDS had $8.3 billion in revenues, $0.4 billion in U.S. GAAP operating income, and $0.8 billion in Adjusted EBITDA for 2024, excluding the Aptiv business from which it will be separated.
Aptiv comes to this spinoff with a long and mixed legacy of spinoffs and their results for shareholders. This appears to be a classic case of a company shedding a business with slim margins and slow growth, leaving behind a high growth, high margin business that they hope will be rewarded with a bigger multiple.
And that final piece of history we were coming back to? In 1984, GM purchased Ross Perot’s company, EDS(Electronic Data Systems). In 1996 GM completed its tax free spinoff of EDS. Aptiv’s EDS spinoff is not only the second EDS spinoff we know of, but both come from the same lineage of companies. What a delightful coincidence!
Disclosure: The author has no position in any stock mentioned, but did once own both GM and Delphi pre-bankruptcy. He also once rented a Chevy.