Saturday, June 30, 2007

Richard Pzena: Lear Undervaluation Summary

    1. Lear’s core business of automotive seating is fundamentally sound and has good long term prospects. While Lear’s earnings came under pressure in recent years, there are signs that the business is recovering and delivering strong results. Lear has reported two positive earnings surprises in the last three months.
    2. The Icahn offer of $36 is inadequate and significantly undervalues the company. We believe that Lear’s core auto business of seating, electrical and electronics is worth over $50. Its share of the interiors joint-venture with Wilbur Ross is worth over $4. Lear’s sizable tax loss carry-forward is worth $4 as well. Hence we estimate that Lear is worth $55-$60.
    3. The flawed process of the deal put Carl Icahn in a highly privileged position and made it unlikely that competing offers would surface. The ‘poison put’ that Lear inserted into its November 2006 debt offering and large break-up fee payable to Icahn if another bidder was selected made it much more difficult and costly for other potential bidders. Further, management is conflicted given their significantly enhanced economic interest in the company following the deal. Thus, the lack of a competing offer in no way implies that the buyout offer is fair.
    4. There is no compelling reason to sell the company at the present time when business recovery is just under way. There are challenges and risks involved in executing Lear’s long term business plan, as there are in any business. The strategy of pursuing non-Big-3 customers is working as evidenced by the growing Asian business at Lear. The recent settlement between Delphi and the union is one major step in the direction of lower probability of short term production disruption in North America and longer term restructuring of the Big-3’s North American operations.
    5. Since the Icahn offer in February, the auto suppliers sector has rallied on average by 15%. Lear’s share price has been capped by the offer while earnings guidance has increased by 7%. Should shareholders reject the deal, we do not think that the near term downside risk to Lear’s current price is significant in light of the current valuation of the sector.

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Source: Lincoln Minor

1 comment:

Kimberley said...

I think the bid opportunistic and that Icahn has persuaded the Directors to his side, that is rather than the shareholders.

You may recall that last year Lear were excited about the batteryless Transense TPMS system offered through Melexis, Texas Instruments and Honeywell. The actually Honeywell made pressure sensor is the same as used by Michelin in its new eTire product for trucks.

I think it is a very attractive product and Lear have been promoting it in Europe and Japan as well as the US. As it is designed to combine with the existing RKE and is environmentally friendly it has much to recommend it and if deals have been/are being signed then Lear are going to do very well with this offering.

I don't know what deals have been struck but I would imagine that the Directors have a good idea what they have and what they hope to sign up. I imagine Icahn must have a shrewd idea also.

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