King Lear?

Carl Icahn makes a conservative bid for Lear, but Wall Street may not think he can unlock more value from the parts maker

Big private equity money has been sniffing around the auto parts business for about two years now with few deals done. It looks like a big one may finally happen.

Billionaire investor Carl Icahn has bid to take over the 84% of auto interiors specialist Lear (LEA) that he doesn't already own. On Feb. 2, Icahn offered $2.3 billion, or $36 a share, effectively putting the company in play. But other shareholders say he's just looking to buy the Southfield (Mich.) company on the cheap and build much greater value as last year's restructuring moves start to boost profits.

Icahn's move shows that while there is interest in Lear, it's still private equity that likes auto parts, says Thomas Stallkamp, a former Chrysler Group (DCX) executive who is now a partner at private equity firm Ripplewood Holdings, which own some parts makers, including Japan's Asahi Tec. Wall Street still sees the parts business as troublesome. "It shows that there's still interest in the space because some people think it may have bottomed out," Stallkamp says.

With the bid, Icahn clearly sees some future value, Stallkamp says. But his low price shows that he is being cautious. "Normally, for a company that's relatively healthy you'd see a premium of 15% to 20%," he says.

Awaiting Board Recommendation

Like most parts suppliers, Lear has struggled as business from Detroit's carmakers has fallen and raw material prices have risen. But the company is in the black and has positive cash flow. Last year's restructuring yielded a slim operating profit of $115 million—after restructuring charges—on sales of $17 billion. The company generated $116 million in cash. That has prompted some shareholders to argue that Lear is worth more in the long run than Icahn is offering now.

When Icahn made the offer, his bid price was just 4% above the Feb. 2 closing price of $34.67 a share. But news of his bid pushed the price up 11%, to $38.64 a share.

Lear said its board met over the weekend to discuss the proposal and will make a recommendation to shareholders soon.

Competing Bid Likely

But at least one large shareholder thinks the company will continue to make progress and that Icahn's bid is a lowball offer. Richard Pzena, chief investment officer of Pzena Investment Management, which owns nearly 11% of the stock, says that in the long run Lear is worth $60 a share. Pzena says he has spoken with other shareholders and has told the company that his firm doesn't like Icahn's bid.

"The company is making all the necessary steps to stage a recovery," says Pzena. "If they want to sell the company, they should put it up for bid."

The other side says that Wall Street still doesn't like parts companies, so getting to $60 a share would be a long shot. Lear's stock is up nearly 30% this year, more than any other in the segment, says company spokesman Mel Stephens. So it could be the right time for some investors to cash out.

In any case, Icahn can likely look forward to some competition. Pzena says one option is to find others to bid on the business. Morgan Stanley (MS) analyst Jonathan Steinmetz says Canadian interiors firm Magna International (MGA) or French seat maker Faurecia could both be interested.

Private equity investor Wilbur Ross bought Lear's European seating business last year to become part of his International Auto Components Group, which includes 27 facilities in Europe, Japan, and South America. But whoever gets the next deal with Lear—whether it's Icahn or someone else—the price is likely to rise.

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