It’s been obvious for a long time that it wasn’t a match made in car-part heaven.
So last week, after two years of problems, Motorcar Parts of America in Torrance announced it had broken off its subsidiary Fenco, which filed for Chapter 7 bankruptcy liquidation the next day.
The news was cause for renewed confidence in Motorcar Parts; it was one of the biggest gainers on the LABJ Stock Index, rising 21 percent to $7.40. (See page 38.)
Fenco was the brand name for Fenwick Automotive Products Ltd., a Toronto company that also had a division in Torrance. At least three Fenwick manufacturing and distribution facilities in Pennsylvania closed before the bankruptcy filing, with about 200 layoffs, local media reported.
Motorcar Parts announced that Fenco was separated and managed by a restructuring officer and its own board. George Miller of Miller Coffey Tate LLP in Philadelphia will be the trustee during the bankruptcy process.
“While Fenco had made progress in its transition plans for the undercar segment since the acquisition, the cost savings and operational efficiencies were not sufficient for Motorcar Parts to continue its involvement with Fenco under the current financial structure,” Selwyn Joffe, chief executive of Motorcar Parts, said in a statement last week announcing the separation of the companies.
Motorcar Parts exhausted multiple options before walking away from Fenco. The company tried to keep Fenco afloat for two years by trying to raise additional money and streamlining Fenco’s operations.
Joffe declined to comment through Motorcar Parts spokesman Gary Meier, who said the company would offer specifics when it releases its earnings soon.
A sale was not viable because of Fenco’s debt, one analyst said.
“Fenco is insolvent,” said B. Riley and Co LLC analyst Jimmy Baker in Chicago who covers Motorcar Parts. “There’s nothing to sell. Debt holders have claims in every piece of the business and then some.”
Motorcar Parts, which started in 1968, primarily manufactures and remanufactures under-the-hood parts for cars such as alternators and starters, selling the parts to retailers, repair shops and wholesalers.
The manufacturer bought Fenco, which makes and sells under-the-car parts such as brake calipers and clutches, in a stock deal worth more than $5 million in 2011.
When the purchase was announced, investors saw it as a major coup that would allow Motorcar Parts to broaden its product offerings.
At the time, Fenco was a struggling company that Motorcar Parts hoped to turn around. It was a good time for the car-parts industry: The recession was forcing people to keep their vehicles longer than they had in the past, so car owners and their mechanics were more likely to buy aftermarket parts.
But Fenco’s ongoing problems dragged Motorcar Parts down.
Fenco’s internal accounting was not up to U.S. standards, forcing Motorcar Parts accountants to recalculate Fenco’s books, which led to delayed filings for Motorcar Parts. Then accountants discovered Fenco was worth $5 million less than initially thought.
Before Fenco was acquired by Motorcar Parts, it gained market share with low prices. When Motorcar Parts took over and tried to raise prices, Fenco lost major customers, including one that brought in one-third of its revenue.
Fenco’s operations were also draining money from Motorcar Parts. Motorcar Parts also tried to consolidate Fenco’s operations by placing its logistics operation in Pennsylvania and shipping out of Torrance.
In 2012, Motorcar Parts sold discounted unregistered securities to raise money to keep Fenco afloat. Later that year, Motorcar Parts signed a deal with Chinese car parts manufacturer Wanxiang for a $20 million line of credit.
But at some point, Motorcar Parts realized Fenco needed more capital than it wanted to provide, and bankruptcy was its best option.
“It was just a failed acquisition,” said Baker. “At some point you have to recognize that.”
Motorcar Parts can write off Fenco’s losses for tax benefits, Joffe, the CEO, said in announcing the end of the Fenco debacle.
Even as Motorcar Parts announced its split with Fenco, Joffe said Motorcar Parts said that it would report record revenue of $213 million for the fiscal year ended March 30.
“It’s not consuming Motorcar Parts’ resources anymore,” Baker said.
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