Perfect TEN: Tenneco Purchases Federal-Mogul From Icahn And Plans A Spin Off

Tenneco (TENhas agreed to purchase Federal Mogul from Carl Icahn for the hefty price of $5.4b. The total tag includes the assumption of debt and a mix of both cash and stock. Mr. Icahn is expected to remain a shareholder of Tenneco into the future and will own approximately 36% of the company. The deal is expected to close later this year, but the big news for this site is that the combined entity will then begin the process of breaking itself into two. One company will be an aftermarket parts business and the other a powertrain focused business. The spin is expected to be completed in Q2 2019 and after the deal Mr. Icahn will own approximately 36% of Tenneco.

Federal Mogul once considered the exact same move, openly discussing spinning off its powertrain business into a standalone company. The company was struggling at the time though and in the midst of integrating a large acquisitions leading to delays. The spin process dragged on and on and eventually the idea was scrapped altogether when Mr. Icahn just bought up the remaining stake in the company he didn’t own.

The upside is that now there will be a bigger parts business with a combined $10.7b in revenue and a bigger powertrain business with ~$6.4b in revenue. Oh yeah, and Mr. Icahn ends up with a lot more money.

Ultimately, the deal solves lingering problems for both companies. Mr. Icahn is heavily invested in the automotive space throughout the value chain and this has caused some issues for Federal Mogul. Bloomberg notes that ‘Federal-Mogul’s own customers — retailers like AutoZone Inc. and O’Reilly Automotive Inc. — bristled at the fact the billionaire investor was both their supplier and competitor through his many auto-related holdings’. Competing against your customers is always tough and this merger and spin will solve that problem. Post-spin Mr. Icahn will give up his board seat at the autoparts business while remaining on the board of the powertrain business.

For Tenneco, the hope is this deal addresses their stock’s chronic undervaluation problem. Although it continues growing at a steady clip, according to UBS, as of the time of transaction announcement, the company trades at just 4.9x EBITDA. Part of the problem is that a good chunk of its pre-merger powertrain business is related to ‘clean air’ solutions, a business which many are putting a zero valuation on. Despite the fact that environmental regulations are getting stricter in many parts of the globe, electric vehicles (‘EV’) don’t need those components. Its future is in danger. The deal will diversify the company’s powertrain business, but it will also expose its cheap valuation compared to its peers. UBS estimates that if the aftermarket business spinoff ultimately achieves a mere 7.5x EBITDA multiple (vs. 9x for its peers), the implied valuation for the powertrain business would only be 3.5x EBITDA (vs. peers at 6.6x). At a full aftermarket peer multiple of 9x, the implied valuation for the powertrain business would only be 2.7x! Compared to a peer set at 6.6x EBITDA it would seem to merit a further look especially considering the timetable for pure EVs reaching scale is still a ways out. Of course, the stock has only gone further south since the announcement.

We will keep you updated as the various steps of transaction progress.

Disclosure: Author holds no position in any stock mentioned.


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