Borgwarner has announced plans to spin off its Fuel Systems and Aftermarket segments into a separate business, as it focuses on electric vehicle technologies.
The company, which finalised its acquisition of Delphi in 2020, will separate the businesses, with the Fuel Systems and Aftermarket sections becoming a publicly traded ‘NewCo’. On a call with investors, Borgwarner confirmed that shareholders in the parent company would be given shares in the NewCo “pro-rata”.
“The BorgWarner Board believes a strategic spin-off of our Fuel Systems and Aftermarket segments would be the best path forward to further the transformation of our company. The intended separation supports optimising our combustion portfolio and advancing our electrification journey while NewCo would be able to pursue growth opportunities in alternative fuels, such as hydrogen, and in Aftermarket,” said Alexis P. Michas, Non-Executive Chairman of the BorgWarner Board of Directors.
“Ultimately, we expect the intended separation to maximise shareholder value by having two focused and strong companies, each pursuing their respective strategies.
Borgwarner to become EV-only brand
As part of the company’s ‘Charging Forward’ strategy, it is focusing its efforts on delivering its profits through products and services focused solely on electric vehicles. Following completion of the intended separation, BorgWarner would consist of the company’s current e-Propulsion & Drivetrain and Air Management segments.
Currently, this arm of the Borgwarner business has $3.1 billion in booked revenues for 2025, exceeding the targets of the Charging Forward plan. The creation of the NewCo will also help its strategy by completing its dispositions target of $3.3 billion worth of business.
Borgwarner believes it is positioned to be a market leader in EV propulsion, with long-term, secular growth opportunities and an enhanced focus on the development and commercialisation of EV technologies, while continuing to deliver top-quartile margins and strong cash generation.
Combustion-engine aftermarket less important
The NewCo is expected to benefit from its embedded relationships with global OEMs and focus on the global vehicle parc, which would be predominantly combustion-based through 2040, according to Borgwarner. It would also plan to capitalise on the growth trends in Gasoline Direct Injection (GDI) and Hydrogen Injection Systems.
“The Company’s current Fuel Systems and Aftermarket segments have delivered significant operational and segment margin improvement over the last couple of years, despite the challenging industry volume environment,” Borgwarner added in its statement. “We expect NewCo to maintain its strong, double-digit operating margin profile, which the Company believes should enable it to deliver solid free cash flow. Finally, it is anticipated that NewCo would have moderate leverage and solid liquidity, providing it with the financial flexibility to support its current business operations and longer-term strategies that further enhance shareholder value.”
Through the first nine months of 2022, the Aftermarket segment generated revenue of just under $1 billion and segment adjusted operating margin of 14.5%.
The split highlights how some companies are choosing to forge ahead with electric-only strategies, with the aftermarket suffering as a result. As carmakers phase out combustion-engine models, those suppliers with OEM contracts must look at the profits available from both electric and standard drivetrain businesses. Many will produce fewer components for the aftermarket than they will for OEMs, meaning more expense and smaller profits should they keep these lines open, even when the cars have finished on the production lines.
“We are incredibly proud of the progress we are making executing our ‘Charging Forward’ strategy,” said Frédéric Lissalde, President and Chief Executive Officer, BorgWarner. “At the same time, our electric vehicle business is accelerating. We believe we are already on track to exceed our 2025 organic EV sales target, and over the last two years, we have announced or completed four acquisitions.
“The intended separation of our Fuel Systems and Aftermarket segments would be an important next step to further our pivot to EVs and advance our vision of a clean, energy-efficient world, while at the same time creating a new, focused entity with strong financials to support its future. With Fuel Systems growing faster than the market and Aftermarket expected to benefit from favorable long-term trends, we believe NewCo would also be well positioned for success as a standalone public company.”
During the investor call, it was asked how the company would look after the electric vehicle aftermarket following the split.
“The vehicle parc right now is very much combustion-engine based, and Borgwarner will retain some aftermarket businesses that are embedded in our e-propulsion units and drivetrain management units,” added Lissalde.
The split is expected to be completed in late 2023.
Frédéric B. Lissalde, President and Chief Executive Officer, BorgWarner
