Analyst calls ArvinMeritor acquisition of Dana a "credit nightmare"

New York, July 9 - ArvinMeritor's proposed acquisition of Dana Corp. is "a credit nightmare waiting to happen," according to Gimme Credit analyst Carol Levenson.

She described the transaction as "add one junky auto parts company to another even junkier auto parts company, stir in a hefty portion of incremental debt, season with hostility, and bake the whole mess in a nasty economic environment."

"The losers on both sides of the transaction will be the bondholders," Levenson added.

Using both companies' trailing 12-month results, she projected that before synergies ArvinMeritor's debt to EBITDA will grow to nearly five times with EBITDA to interest falling to 2.5 times. With $200 million of synergies, debt to EBITDA would be four times and EBITDA coverage three times.

"Although the combination will benefit from greater scale and a strong product mix, we're not buying the argument that the business risk of the combined companies will lessen," Levenson added. "Exposure to the Big Three automakers, the commercial vehicles market, and the automotive aftermarket will remain significant if better balanced, and both companies carry some asbestos liability risk."

She also noted Dana's capital spending has been less than depreciation recently - a situation that cannot continue indefinitely.

The only way to restore credit quality is to sell assets or issue equity, Levenson added.

She sees the combined company as a weak double-B but warned "there's a strong possibility a higher bid and/or defensive moves by Dana could produce an even worse outcome."

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