Guest Pitch: TI Fluid Systems (TIFS:L)

Merger Arbitrage – 13.5% Upside

This idea was shared by Giorgi.

Tier 1 auto parts supplier TI Fluid Systems has been targeted by its private peer ABC Technologies, which is backed by Apollo. A few days ago, ABC/Apollo lobbed a non-binding £2/share cash offer. The gross spread stands at 13.5%. The transaction is subject to the finalization of due diligence and financing, with a PUSU deadline set for November 8. It’s highly probable we’ll see a definitive agreement soon, and once that happens, I expect the spread to be largely eliminated.

The risk of the buyer walking away is minimal. Apollo appears to be a motivated buyer, having previously submitted four bids (all rejected) before the current offer was recommended by the target’s board. The present bid is 20% above the initial offer of £1.65/share, and 50% premium to pre-announcement prices. The downside to pre-announcement levels is significant, around 20%. However, I believe the likelihood of binding papers being signed is strong enough to outweigh the risk.

The transaction fits well with the buyers’ business strategy. Apollo acquired a majority stake in ABC Technologies in 2021 to accelerate the consolidation of powertrain-agnostic OEM suppliers. While ABC originally focused on the interior and exterior auto component markets, Apollo broadened its scope into Fluid Management in 2022 with the $255m acquisition of dlhBOWLES. TIFS represents the second, and much larger, acquisition in the Fluid Management space for ABC. TIFS is the global leader in brake and fuel line systems:

Note – the data is from the target’s 2017 prospectus, but the situation has remained largely unchanged.

TIFS is also one of the top players in the plastic fuel tank market, ranking 4th or 5th in the respective regions. However, there’s minimal product overlap with ABC, as its previous acquisition, dlhBOWLES, focused mostly on windshield wash and camera/sensor cleaning systems – areas where TIFS doesn’t compete. Overall, this acquisition fits seamlessly into ABC’s roll-up story, providing both international expansion and product diversification within the Fluid Management/auto components space.

Shareholder support is essentially locked in. Bain Capital, which owns 28% of TIFS, has two representatives on the board and likely played a pivotal role in negotiations with Apollo. Bain has been gradually reducing its stake in TIFS, going from 44% ownership in 2021 to 28% now. The most recent sale in March 2024 was at £1.35/share, a 20% discount to the market price at the time and about 35% below Apollo’s current offer. It’s a curious situation – one large PE firm selling out while another buys in at a premium. However, Bain doesn’t seem to have other interests in the Fluid Management sector, whereas Apollo can leverage TIFS to strengthen ABC Technologies and drive synergies from the acquisition.

The offer appears fair and values TIFS at approximately 4.5x run-rate adjusted EBITDA, which is consistent with valuations across the broader OEM component supplier market, where most players trade below 5x EBITDA. Two of TIFS’s closest competitors in the fluid management space – Cooper Standard (CSP) and Martinrea (MRE:TO) – are trading at 4.3x normalized adjusted EBITDA and 3x adjusted EBITDA, respectively.

Regulatory risk seems minimal since ABC/dlhBOWLES is a small player in the Fluid Management sector relative to the top four in the U.S., and there’s essentially no product overlap with TIFS.

A portion of the current spread likely stems from investor skepticism surrounding the non-binding stage of Apollo’s bid, partly because of Apollo’s earlier failed attempt to acquire John Wood Group (WG) in 2023. The deal was ultimately dropped after due diligence. Similar to TIFS, Apollo made several offers for WG – four were rejected before the fifth was accepted. But that’s where the similarities end, and I don’t believe the WG outcome has any bearing on the TIFS deal.