Delphi's Korean JV partner complicates unit sale - sources

(Reuters) - U.S. car parts maker Delphi's sale of its air conditioning business is being complicated by potential problems with one its South Korean joint venture partners, three people familiar with the deal said. Delphi's Thermal Systems business has caught the eye of France's Valeo, Germany's Mahle and Japan's Denso and a sale could fetch more than $700 million (443 million pounds). Delphi and South Korean companies Erae and Daewoo jointly hold a company called Kdac, which had sales of $1.2 billion in 2013, a quarter of which it generated in its heating, ventilation, and air conditioning (HVAC) division. The potential problems stem from the fact that Erae had expressed an interest in Delphi's air conditioning business, or Delphi Thermo, but is being sidelined from the process, the sources said. "Erae handed in a tentative bid for Delphi Thermo, was allowed to the second round, but was then effectively excluded from the process by being denied access to information," one of the people said, not elaborating further. There is concern among other bidders about what Erae might do if it does not succeed in buying the air conditioning division, another person familiar with the deal said. "Access to the Korean market is seen as key (to Delphi Thermo's future development) and it is very hard to get," the person said. However, some other people familiar with the deal said the Korean joint venture partner was possibly less significant a factor than bidders' expectations for how quickly Delphi Thermo can be turned around. In the first nine months of 2014, Delphi's Thermal Systems saw its gross margin rise slightly to 8.8 percent, about 10 percentage points short of margins seen at the larger electronic architecture, powertrain systems and electronics and safety. Delphi's Thermal Systems unit posted adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) of $80 million on sales of $1.5 billion in 2013. According to people familiar with the Delphi Thermo sale, the business is expected to post 2014 core earnings of almost $100 million and possibly significantly higher earnings in following years. It may be valued at 6-7 times its earnings, they said. Korean Halla Visteon Climate Control was also seen as a potential buyer of Delphi Thermo. However, Visteon is in the process of selling its controlling stake in the Korean business and this may be a distraction, a person familiar with the situation said. Delphi, its advisor Barclays, Mahle and Valeo declined to comment, while Erae, Japan's Denso and Halla Visteon were not immediately available for comment. (Reporting by Arno Schuetze and Pamela Barbaglia; editing by David Clarke)