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As published by Dustin Walsh, Crain’s Detroit Business
Experts say $281 million offer an exit play
Billionaire investor Carl Icahn is taking Southfield-based auto supplier Federal-Mogul Holdings Corp. private after months of raising his offer price to the company’s other shareholders.
What’s his game? He is likely to resurrect a plan scrapped last year to split the company’s powertrain and aftermarket divisions, with intentions of selling at least one. The investor also may parlay part of Federal-Mogul into his recently acquired Pep Boys auto-parts chain to create larger profit margins for both.
The majority shareholder in the maker of Wagner brakes and Champion spark plugs, Icahn Enterprises LP, offered $9.25 per share for the remaining 18 percent stake it does not already own in a deal valued at roughly $281 million.
Supported by the Federal-Mogul board, the deal will take the publicly traded company, which also makes pistons, bearings and aftermarket parts, private under Icahn’s control.
Federal-Mogul declined to comment because the deal is not yet finalized.
Consultants and executives scrambled over the long Labor Day weekend to prepare the going-private deal because a buyer is likely waiting in the wings, said Pat O’Keefe, managing member of Bloomfield Hills advisory firm O’Keefe and Associates LLC.
“Maybe he already has an exit (a buyer) in his back pocket,” O’Keefe said. “This is absolutely an exit play; why else would he offer so much so quickly?”
In February, Icahn offered $7 per share for the remaining shares, then upped the bid to $8 per share in June. A deal never materialized.
The $9.25-per-share bid is an 86 percent premium over the supplier’s share price of $4.98 in February.
The bids show Icahn is desperate to gain total control of Federal-Mogul and to finally make a move to rid himself of at least part of the business, said Matteo Fini, senior manager of component forecasting for IHS Automotive Inc. in London.
“I don’t think (Icahn) wants to continue to run an automotive business for the rest of his days,” Fini said. “Spinning off one or both of the businesses is the most effective way to get value out of a complex portfolio.”
The question remains whether Icahn will take either piece of the company public again — as was planned last year. Icahn scrapped that plan in January, with company officers pointing to market conditions as the culprit.
It’s predicted that Icahn will vertically integrate the supplier’s aftermarket division with auto parts retail chain Pep Boys, which he acquired for $1.03 billion in a bidding war in December.
Pep Boys’ 800 stores, paired with Icahn’s other parts retailer, the 278-location Auto Plus, would make up the fifth-largest retail auto parts chain in the U.S. Even with Pep Boys’ stores, Auto Plus would be significantly smaller than rivals Advance Auto Parts Inc., Autozone Inc. and O’Reilly Automotive Inc.
“This looks like a backward vertical integration play,” said Steve Wybo, senior managing director for Birmingham-based advisory firm Conway MacKenzie Inc. “Federal-Mogul has strong (aftermarket) brands. If we’re going into a recession, or (auto) sales slow down, we’re going to have aging vehicles that are going to need aftermarket parts.”
Ford Motor Co. chief economist Bryan Bezold said car sales have hit a plateau after steadily rising following the 2008-09 recession, Automotive News reported. The auto industry outperformed the overall U.S. economy in those years largely due to pent-up demand that has now played out.
In late July, Ford was the first major automaker to confirm the lofty sales gains achieved since 2010 were at an end, even though they are still about 65 percent higher than the lowest sales year in 2009.
Ford is predicting that the slide will continue into next year, which could be a win for Federal-Mogul’s aftermarket division.
Federal-Mogul Motorparts, its aftermarket division, represents 43 percent of its $7.4 billion in revenue.
However, questions remain over what Icahn would do with its powertrain division once the company goes private under his full control. The same looming auto sales recession that would benefit the aftermarket unit would plague Federal-Mogul’s powertrain division.
Wybo said Icahn is likely to ditch the division in a fire sale or a small public offering.
“There’s no impressive revenue growth, and he probably has a liquidation or sale in mind for that business,” Wybo said. “If I’m him, I’d say ‘it’s time to get rid of this dog that I’ve owned for too long.’?”
Following the 1998 acquisition of Cooper Industries, which manufactured its existing aftermarket brands, such as Anco wiper blades and Champion spark plugs, Federal-Mogul made a misstep that’s plagued its balance sheet ever since.
That same year, Federal-Mogul acquired U.K.-based Turner & Newall — which at the time was one of largest manufacturers of asbestos-related products, including automotive brake pads. Federal-Mogul inherited a known liability of a health crisis tied to Turner & Newall’s factory in Armley, England, which closed in 1959. Federal law prohibited the use of asbestos in brake pads for new cars in 1995 and for aftermarket parts in 1997.
Asbestos dust contaminated the town and led to an outbreak of asbestos-related illnesses, including cancer. The link to the factory was established more than a decade before Federal-Mogul acquired the company. Federal-Mogul carved out an additional $2.1 billion to cover the liability. Along with Federal-Mogul’s other brake business, which also used asbestos, the company was tied to thousands of lawsuits from as many as 500,000 claims.
In 2001, the liabilities pushed the company into Chapter 11 bankruptcy, where it remained for six years.
“This is not something we wanted to do,” Frank Macher, then chairman and CEO of the company, told the Wall Street Journal. “The decision was based on the fact that asbestos liabilities weren’t going to diminish. In fact, they were going to grow.”
Federal-Mogul held nearly $9 billion in liabilities, not all tied to the asbestos claims, at the time of the filing.
Icahn, through affiliates, purchased $1.1 billion in Federal-Mogul bonds during its bankruptcy, which were converted to equity when it emerged in December 2007. Months later, the investor acquired 50.1 million shares of common stock originally distributed to an asbestos trust fund for $900 million, giving him a 75 percent stake in Federal-Mogul. He later upped that to 82 percent.
Federal-Mogul has struggled to stay profitable since leaving bankruptcy.
Subtracting certain tax and impairment gains, Federal-Mogul has reported only two years of profitability under Icahn.
Icahn initiated significant cost-cutting strategies in 2013, including the closing or downsizing of seven plants and a divestiture. In June 2014, the company sold its connecting rod and camshaft business to Addison, Ill.-based JD Norman Industries Inc. It also moved to a downsized headquarters in the former Blue Cross Blue Shield of Michigan headquarters complex in Southfield in a cost-savings effort.
But the supplier hasn’t kept pace with the rest of the industry, Wybo said.
“There’s no impressive revenue growth in what’s been record years for the auto industry,” Wybo said. “They’ve only grown around 15 percent (revenue) since the recession. That’s just not enough. I suspect in six months we’ll see a different owner for that business. Icahn is probably fatigued from the thing.”