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WILMINGTON, Del. (CN) — A shareholder claims in a class action that Carl Icahn is taking advantage of his control of transportation parts and services company Federal-Mogul and its depressed share price to take it private on the cheap.
Icahn Enterprises, Carl Icahn’s vehicle, is offering $9.25 per share for the 18 percent of Federal-Mogul shares it does not already own. Icahn, known as a corporate raider for his many deals involving major corporations, has an estimated personal net worth of $17 billion.
Plaintiff Michael Lemanchek calls the proposed transaction “the result of a flawed sale process, [which] substantially undervalues Federal-Mogul’s stock.”
Federal-Mogul Holdings manufactures powertrain components, system protection products and aftermarket automobile parts.
“Federal-Mogul and Icahn Enterprises jointly announced the proposed transaction as an 86 percent premium over Federal-Mogul’s closing price on Feb. 26, 2016, the day before Icahn Enterprises’ initial offer of $7 per share, implying that any gains in share price were solely related to the offer and not Federal-Mogul’s positive financial results during 2016,” Lemanchek says in the Sept. 30 complaint in Delaware Chancery Court.
Analysts such as Gabelli & Company, which owns a stake in Federal-Mogul, “put a private market value of $13 per share for 2016 and a $16 price target for 2017 on Federal-Mogul,” Lemanchek says in the complaint.
“After the [merger] announcement, many speculated that this was Icahn Enterprises’ attempt to vertically integrate its auto parts business, considering the recent acquisitions of retailers PepBoys and Auto Plus,” the complaint states.
Or, “Icahn Enterprises may already have a buyer in place,” Lenanchek says in the lawsuit, citing Pat O’Keefe, managing member of O’Keefe and Associates, a consultant firm based in Detroit.
Citing another commenter, Steve Wybo of Conway MacKenzie, Lemanchek says that Wybo has “predicted that Federal-Mogul will have a different owner within six months because Icahn Enterprises intends to make a quick sale after the proposed transaction is completed.”
The complaint continues: “Whatever his intent may be, he is required to disclose that intent as well as any discussions he may have had regarding his post-close intentions.”
Lemanchek adds that preclusive deal protections in the merger agreement “substantially favor Icahn Enterprises and are calculated to unreasonably dissuade potential suitors from making competing offers.”
Icahn Enterprises gained control of Federal-Mogul in 2007 when it exercised an option after the company emerged from bankruptcy, shedding its substantial asbestos-related claims in the process, according to the complaint.
Since then, Icahn has appointed every board member and consolidated his control of the company through a rights offering, and by causing the company to pay for Icahn Enterprises’ affiliates’ operating expenses and pension obligations, Lemanchek says.
By this year, according to the complaint, “Icahn Enterprises had: (i) appointed every board member; (ii) diluted the ownership of other shareholders while increasing its own through rights offerings; (iii) given a long-time associate, [lead defendant Daniel A.] Ninivaggi, a compensation package well above any other executive; (iv) freely replaced directors; (v) caused the company to incur the pension debt of other Icahn Enterprises affiliates; and (vi) caused the company to pay a portion of the expenses of another Icahn Enterprises entity.”
Ninivaggi has been co-CEO and co-chairman of the board since February 2014.
With Icahn firmly in control, Lemanchek says, “Icahn Enterprises informed Federal-Mogul of its intent to purchase the remaining 18 percent of the company’s publicly traded shares at $7 per share conditioned on approval of a majority of the minority shareholders.”
Because the Federal-Mogul board was conflicted, a special committee was formed “to consider and negotiate the terms and conditions of the proposed transaction or any alternatives.”
But Lemanchek says two of the three of the members of the special committee are beholden to Icahn by virtue of board appointments. He also claims that during the merger negotiation process Federal-Mogul management held meetings with Icahn Enterprises that did not include the special committee.
Icahn Enterprises raised its offer price to $9.25 after Federal-Mogul announced bullish financial results for its second quarter in July this year. That offer was accepted in late September.
“Having failed to secure a reasonable sale price for the company, members of the board breached the fiduciary duties they owe to plaintiff and the company’s public stockholders, because the company has been improperly valued and stockholders will not receive adequate or fair value for their Federal-Mogul common stock in the proposed transaction,” Lemanchek says.
He seeks class certification, rescission of the merger if it goes through, or “a quasi-appraisal remedy,” and damages for breach of fiduciary duties.
He is represented by James Banko with Faruqi & Faruqi in Wilmington.