Icahn Makes Offer For Federal-Mogul Shortly After Motorparts Spinoff Is Scrapped

Sadly, not every announced spinoff actually ends up executed. For example, earlier this week we highlighted Fidelity National Venture’s (FNFV) postponement of its restaurant group spinoff while it exercises patience and awaits better ‘market conditions’. Another recently scrapped spinoff was Federal-Mogul Holding’s (FDML) planned separation of its Motorparts business from its Powertrain unit. The decision shouldn’t have come as a total surprise as the spinoff had already been postponed once before. Actually, the spin was initially planned for the first half of 2015, but as we noted back in May, it was pushed off as the company worked through the integration of several recent and large acquisitions. As a reminder, the company acquired TRW’s engine components, Affinia’s chassis business and Honeywell’s brake friction unit.

The press release on their website announcing the decision was rather short and lacked any real detail:

Federal-Mogul Holdings Corporation (NASDAQ: FDML) today announced it has terminated its previously announced spin-off of its Motorparts division. The Company will continue to operate in two separate, independent segments with separate CEOs who will each report directly to the board of directors.  The separate divisions more effectively serve their unique markets and allow each operating segment to more quickly react to its respective market conditions.

Straight to the point. The recent quarterly conference call provided a little more information on the decision though:

Franklin Jarman [Goldman Sachs]

Great. And then just — I know that you’re not planning to discuss the offer from Icahn. But going back to January, you talked a little bit about early — you provided a press release with regards to the formal separation plan being terminated. You now — obviously, we have the news with regards to the go private offer. Without, I guess, commenting on the deal, can you just better help us understand what the long-term strategic plans at the company looked like at this point, especially after the termination of the separation plan since we haven’t really received an update post that event?

Daniel A. Ninivaggi [Co-Chairman, Co-CEO, CEO of Motorparts]

Yes. I mean, first of all, the 2 events are completed connected. They’re not related at all. But the decision to terminate the spin, the decision to spin was always also had — always have a number of factors, some positive some negative, and there’s balancing of those factors. And from the time we announced the plan to do the spin back in, I think, September 2014 to January, those factors sort of became more negative, particularly market conditions. So there were several factors that I think the board considered, but sort of the capital markets environment was a major one.

Franklin Jarman

So then, I guess, going forward, without these 2 items sort of being connected, is there a chance that you, at some point, revisit the thought of a potential spin based on how you — how the Capital Market story plays out at this point?

Daniel A. Ninivaggi

I wouldn’t expect anything soon. We had to make a decision. The company couldn’t be in limbo. We — the board had basically extended the time line for the spin. They consider all of factors. And ultimately, I think they believed that, in January, we needed more certainty in order to give our customers, employees, et cetera. And so we provided certainty in January. I don’t expect that they’ll revisit that decision anytime soon, so we’re going forward as a single company.

There are three interesting pieces of information in Co-CEO Daniel Ninivaggi’s answers. The first is that the decision appears to be final and the plan is to move forward as a single entity.

Second, the dreaded ‘market conditions’ seem to have struck again. It sort of makes more sense in this case though as Federal-Mogul’s stock price had absolutely cratered, recently dropping below $4 per share. The company has been hit on numerous fronts throughout the income statement with FX challenges on the top line and integration issues (restructuring charges, impairments etc.) wreaking havoc further down. Increased interest expense as a result of additional leverage only added to the woes and the end result has been net losses, balance sheet fears and lower operating margins.

The final noteworthy tidbit is of course the reference to Carl Icahn’s bid to take the company private at $7 per share. The announcement obviously sent shares soaring. As a reminder, Mr. Icahn is the majority shareholder of Federal-Mogul, controlling over 80% of its shares. The bid is an attempt to consolidate control of the company and likely roll it up with his other auto related businesses, such as Auto Plus and (soon) Pep Boys, outside of the public eye.

Federal-Mogul is appointing a committee of independent directors to study the bid and it will need to be approved by a majority of the non-Icahn shareholders. Given the current trading price is over $8, the market strongly expects that Mr. Icahn will need to up his offer in order to win full control of the company. The WSJ article on the bid quoted GAMCO Research Analyst Brian Sponheimer saying that he ‘would be surprised if any of the minority shareholders would see $7 as a fair market value’ and that ‘Federal-Mogul has been restructuring itself and we are just now seeing some of the fruit coming to bear, and it is my opinion there is significant runway for profitability’. His value on the company is at least $13 a share, which represents quite a bit of upside, but is still well below the $29 value he pegged for the company early last year.

This is important because Mr. Sponheimer isn’t just another analyst in this situation. His firm, GAMCO (GBL), owns over 5.7% of FDML’s stock or almost 33% of the non-Icahn controlled shares. Needless to say, its support will be critical to getting a deal done.

It seems that Mr. Icahn is taking advantage of a difficult market and transition period for the company to scoop up the rest from minority shareholders at a discounted price. As Barron’s notes, it’s quite ironic given that the complaint is similar to the one lobbed by Mr. Icahn himself at Michael Dell during the Dell privatization saga. Hey, not always a bad move to steal a page from a successful playbook.

The saga here is destined to continue as Mr. Icahn pursues full control of the company. The most likely outcome is that Mr. Icahn gets the price, but at a higher cost. Hopefully, Mr. Gabelli (who runs GAMCO) can drive a good bargain for the minority holders. Either way, the motorparts spinoff seems dead and it’s likely that Mr. Icahn might have had some influence over that decision.

Disclosure: Author holds no position in any stock mentioned