The rapid transformation of the US supplier sector reached a new frontier last Friday when Carl Icahn struck a deal with Lear Corp management to take control of the seating, interiors and electronics giant.
Detroit Three suppliers had seemingly come to terms with a new era – private equity groups scouring the industry for fixer-uppers.
But hard-nosed 1980s-style corporate raiders have arrived, too, and Icahn’s deal with Lear proves it.
The Icahn deal would make Lear the largest automotive parts maker to be taken private – and sets the stage for more of the same.
If Icahn prevails at Lear, he’ll likely waste no time pushing Lear to slash costs, downsize and pull out of unprofitable businesses.
Lear CEO, Robert Rossiter, who will give up that title to Doug DelGrosso while remaining as executive chairman, said the Icahn deal would make it easier for Lear to cut costs and expand in Asia.
Lear, which has suffered more than $US2bn in losses in the last two years, said it would solicit other offers over the next 45 days. New York financier Wilbur Ross, who already has control of Lear’s former interiors business, might weigh in. Some analysts, however, say they don’t expect other offers to emerge.
John Murphy of Merrill Lynch said the break-up fee that Lear would have to pay Icahn if it accepts another proposal would probably forestall other bids.
“Given the hurdle of a break-up fee and the already full valuation of the offer, we believe it is unlikely that another bidder, strategic or financial, would enter the fray,” Murphy said in a report.
Some Lear shareholders oppose Icahn. “The trend towards private equity firms teaming up with management to ‘steal’ companies from their owners is alarming and we urge you to take a stand to ensure this does not happen at Lear,” executives of Lear’s second-largest shareholder, Pzena Investment Management, wrote to Lear’s board.
Icahn, who already owns a 16% stake in Lear, also has a considerable stake in Federal-Mogul bonds and will control about 70% of the supplier of pistons and transmission parts if it emerges from bankruptcy as planned later this year.
Still, it seems unlikely that Icahn will combine Federal Mogul with Lear.
Now that the most famous American corporate raider is near to acquiring Lear outright, others are expected to take a closer look at the sector’s profit potential. By pouncing on Lear – and winning over management – he is likely to stoke Wall Street’s growing interest in distressed supplier industry companies.
A wider range of financiers is expected to be heard from, including some of America’s most renowned raiders. Among the new names being mentioned are Nelson Peltz of Trian Partners and investor Ralph Whitworth.
Investors have been attracted to the ailing supplier world because of low valuations – and the expectation that things can get better.
But they may be trouble for OEM purchasing bosses, who must adjust to a new set of hard-to-deal-with owners.
What struggling suppliers gain in financial stability, they may lose in commitment to technology and attention to long-term OEM relationships and commitment to technological prowess that is demanded of auto industry participants.
Standard & Poor’s Ratings Services lowered its corporate credit rating on Lear Corp. to ‘B’ from ‘B+’ and placed its ratings on CreditWatch with negative implications following Lear’s announcement.
Studies suggest that R&D spending declines in companies controlled by private financiers in the United States. Detroit’s nervous purchasing executives say that may be okay in some commodity industries, but won’t do in the car business.
Meanwhile, Detroit’s industry observers are pondering another scenario. The talk over the weekend was that, if Carl Icahn can strike at Lear, how long before America’s corporate raiders take aim at what’s left of Detroit’s automakers themselves?