Tenneco to buy Federal-Mogul in $5.4 billion deal, then split into 2 companies

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Automotive News  /  April 10, 2018

Automotive supplier Tenneco Inc. has reached a definitive agreement to acquire Federal-Mogul in a transaction valued at $5.4 billion.

The deal, which will be financed through $800 million in cash, about 30 million Tenneco shares and assumption of debt, will result in two independent publicly traded companies following closing, Lake Forest, Ill.-based Tenneco said in a news release.

The acquisition is expected to close in the second half of this year, subject to regulatory approvals, with the separation occurring in the second half of 2019.

"This is a landmark day for Tenneco with an acquisition that will transform the company by creating two strong leading global companies, each in an excellent position to capture opportunities unique to their respective markets," Tenneco CEO Brian Kesseler said in the release. "Federal-Mogul brings strong brands, products and capabilities that are complementary to Tenneco's portfolio and in line with our successful growth strategies. Unleashing two new product focused companies with even stronger portfolios will allow them to move faster in executing on their specific growth priorities."

The transaction stands to shake up the world of aftermarket parts retailing. Federal-Mogul's parts portfolio features numerous household names such as Champion spark plugs, Wagner brakes, ANCO wiper blades, Moog steering and suspension parts, Goetze engine parts and Ferodo brake pads. Popular brands under the Tenneco portfolio include Monroe shock absorbers, Walker exhaust systems, Rancho suspensions and DynoMax mufflers. 

The two new companies will be born after the union of Tenneco and Federal-Mogul -- one a $6.4 billion aftermarket supplier and the other a $10.7 billion powertrain technology supplier, the company said.

Following the split, it's expected that headquarters for each company will remain in the Detroit and Chicago areas, but a decision on which one would go where has not been made, Bill Dawson, executive director of communications for Tenneco, said in an email. No determinations on maintaining workforce have been made, Dawson said, but noted the companies don't overlap on products.

"It's too early to talk about any integration changes, but it is important to remember that Tenneco's and Federal-Mogul's products and technologies are highly complementary," Dawson said in a email. "We do not manufacture or engineer the same products as Federal-Mogul's Motorparts and Powertrain businesses."

Tenneco shares rose 4 percent to close the day at $57.82. 

More than a century

Federal-Mogul has a long history. The company traces its roots to 1899, the founding year for the Muzzy Lyon Co., which sold mill supplies and rubber goods, but shortly thereafter began a metalworking subsidiary to make bearings. Federal-Mogul was formed in 1924, when Muzzy-Lyon merged with Federal-Bearing and Bushing.

The Tenneco deal is the latest among a trend of suppliers splitting themselves. Aptiv Plc and Delphi Technologies Plc formed as a result of the former Delphi Automotive Plc breaking up last year. Autoliv Inc., the Swedish-American airbag and seatbelt maker, is spinning off its driverless-electronics business and Germany’s Continental AG is considering a shakeup of its structure.

The transaction also is reminiscent of the megamerger between global chemical giants DuPont Co. and Dow Chemical Co., which closed in September 2017. The transaction calls for splitting DowDuPont into three companies focused on agricultural products, materials and chemicals, and technology-based special products. The company said it aimed to complete the split in 18 months from closing. 

Icahn's role

The deal marks a major payoff for billionaire investor Carl Icahn, who has sought to monetize his investment in Federal-Mogul since 2007, when he purchased unsecured Federal-Mogul bonds before its bankruptcy and eventually swapped them for equity as part of the company's reorganization plan.

In early 2017 and after nearly a year of posturing with Federal-Mogul's shareholders, Icahn took full ownership of Federal-Mogul in a roughly $300 million deal.

Icahn Enterprises LP, through his indirect wholly owned subsidiary IEH FM Holdings LLC, sealed the deal after Federal-Mogul's second-largest shareholder, Gabelli Asset Management Company Investors, tendered 7 million shares to Icahn, providing enough shares to take over the public company outright, Bloomberg reported.

"Icahn Enterprises acquired majority control of Federal-Mogul ... when we saw an out-of-favor market opportunity for a great company," Icahn said in a statement. "During that time, we have built one of the leading global suppliers of automotive products. I am very proud of the business we have built at Federal-Mogul and agree with Tenneco regarding the tremendous value in the business combination and separation into two companies. We expect to be meaningful stockholders of Tenneco going forward and are excited about the prospects for additional value creation."

Tenneco posted $9.27 billion in total revenue in fiscal 2017 and reported net income of $274 million. Together, General Motors and Ford Motor Co. comprised more than a quarter of the company's sales last year.

Federal-Mogul posted $7.43 billion in total sales in 2016 and $82 million in net income, the latest year available. In 2015 it had a $110 million loss, and a $168 million loss in 2014. None of Federal-Mogul's customers in 2016 accounted for more than 10 percent of its overall revenue, the company said in its annual report. 

Tenneco ranks No. 31 on the Automotive News list of the top 100 global suppliers with worldwide sales to automakers of $7.35 billion in 2016. Federal-Mogul ranks No. 46 on that list, with estimated sales to automakers of $5.16 billion in 2016.

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