The threat of asbestos litigation has hung over both Honeywell and Federal Mogul in recent years. Now, an ingenious plan has allowed Federal Mogul to increase its share of the car brakes market, whilst allowing Honeywell to remove the cloud over its head. It is a smart move for Federal Mogul that should strengthen its long term prospects.

Federal Mogul, the automotive components manufacturer, is to complete the acquisition of Bendix, the friction materials arm of Honeywell. Federal Mogul filed for bankruptcy protection in October 2001, partly due to slumping sales, but also to shield itself from claims relating to the sale of asbestos by its subsidiaries.

The acquisition gives Federal Mogul even greater strength in the automotive brakes market, with Bendix posting annual sales of around $US1 billion, supplying both the original equipment market, and the aftermarket. At the same time, it allows Bendix to boost its presence in Europe and gain vital exposure in Asia.

What makes the deal unique is the way in which it has been funded, as Federal Mogul has so far acquired Bendix without any outlay. Instead the company has agreed to take on the asbestos liabilities hanging over Bendix, which could reach a potential $2 billion.

It is quite normal for companies facing asbestos litigation to file for bankruptcy. In exchange for emerging from bankruptcy with no further liability, companies form a trust to settle current and future claims in the court-monitored reorganisation. Federal Mogul has used its protected status as an imaginative way to turn its exposure to asbestos claims to its advantage.

For Honeywell, the deal removes the threat of further asbestos liabilities, which have weighed on its shares. Under the terms of the deal, all of Bendix’s operations except two aftermarket plants and an aerospace plant will transfer to Federal Mogul.

The deal is a clever piece of opportunism, although it remains contingent on approval in bankruptcy court, as well as the court’s ruling that Honeywell is shielded from further claims regarding Bendix. It should allow Federal Mogul to grow its core base while at the same time positioning itself to emerge from bankruptcy a stronger company.

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