Lear Deal Still Under Shareholder Scrutiny

The auto parts maker's board backs Icahn's buyout bid, but some investors remain unhappy.
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First, he wooed management. Then billionaire investor Carl Icahn won over


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board of directors with his $36-a-share bid for the auto parts maker.

Now he'll have to gain favor with shareholders, some of whom have filed lawsuits to block the deal.

Lear's board of directors recommended that shareholders vote in favor of Icahn's buyout offer, valued at $2.8 billion, according to a regulatory filing with the

Securities and Exchange Commission


Shares of Lear, which have gained 24% this year amid buyout speculation, were recently down 10 cents, or 0.3%, to $36.56. The stock is still trading at a premium to Icahn's offer, suggesting that some speculators are betting that shareholders will wind up with more.

Investor Richard Pzena, CEO of Pzena Investment Management, has sworn to vote against the Icahn deal, and he is rallying other shareholders to do the same. He says many investors he has contacted who view Icahn's offer as reasonable have already sold their shares in Lear at higher prices.

"Others think it's worth significantly more," says Pzena. "Nobody ever tells you exactly what they're going to do, but it certainly sounds like it's going to be a close vote."

Pzena says the results may hinge on the recommendation of shareholder advisory firm Institutional Shareholder Services, which has agreed to listen to Pzena's case in the coming weeks before it renders its verdict. A shareholder vote on the deal hasn't yet been scheduled.

Pzena's firm holds an 8.8% stake in Lear, and he has been a vocal critic of the offer from Icahn-controlled American Real Estate Partners LP since it was brought to light in February.

Pzena estimates that Lear could be worth as much as $60 a share, and he portrays Icahn as a private equity buyer teaming up with Lear's management to steal the company away from shareholders at a discount while its business is in a downturn.

For its part, Lear's board said its special committee of independent directors determined that the offer is fair and in the best interests of the company and its shareholders. The board cited the difficult operating environment for parts suppliers and the dismal outlook for "Big Three" automakers

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Chrysler Group, which are major customers of Lear.

It also cited an analysis from JPMorgan, which reviewed the offer and decided that the agreement was "fair from a financial point of view" for shareholders.

Pzena points out that Lear lowered its financial projections following a strategic review that began after Icahn and its senior management team started discussions in January.

Last summer, Lear expected to record $14.9 billion in sales for 2007 and $542 million in operating income. Now it projects $15.1 billion in sales for the year but only $488 million in operating income.

For 2008, Lear had previously forecast $14.8 billion in sales and $585 million in operating income. Now that outlook has been lowered to $13.9 billion in sales and $521 million in operating earnings.

Pzena's own forecasts are closer to the original view, and he finds the timing of the lowered outlook "somewhat suspicious," although he admits that he is inclined to be skeptical.

Mel Stevens, a spokesman for Lear, says the company's current outlook, which was made public in January, was lowered "to reflect production cuts and lowered demand in the industry."

Icahn could not be reached for comment.

Lear recently reported sales of $17.8 billion for 2006, with a wider fourth-quarter loss because of charges to sell its interiors unit. After special items, Lear's fourth-quarter results beat expectations on Wall Street.

According to Tuesday's filing, Icahn's firm started buying shares of Lear in March of last year. In November, he and his affiliates purchased 8.7 million shares of the company in a private placement offering. He now owns 16% of the company.

Bob Rossiter, Lear's chairman and CEO, met with Icahn and others in January and discussed the possibility of a buyout. The filing says Rossiter described the current automotive industry environment to Icahn, including production levels, the impact of oil prices on demand for Lear's products and the uncertainty over the auto industry's upcoming labor negotiations. He also discussed Lear's investment plans in Asia and other growth markets and the importance of Lear's restructuring moves.


Rossiter indicated that management remained confident in Lear's business plan but the industry environment, particularly in North America, remained very challenging," said the filing.

It went on to say, "Icahn suggested that the company might be able to take a longer-term focus, more aggressively pursue restructuring initiatives and be better positioned to withstand volatile industry conditions as a private company with a strong financial sponsor."

In late January, Lear's board signed a confidentiality agreement with American Real Estate Partners LP and gave the firm access to the company's financials so it could review possibilities for an acquisition.

On Feb 2, Icahn floated the possibility of acquiring Lear for $35 a share, and the company eventually negotiated the price up to $36. At the time that the offer was announced, the price represented a 4% premium over the company's stock.

"Carl Icahn is apparently a way better negotiator than Lear's management team," says Pzena.