Icahn's January Plays Could Ruin His 2012 Plans

NEW YORK ( TheStreet) -- Carl Icahn's Icahn Enterprises ( IEP) has a slate of January deals deadlines - including a $1.73 billion tender offer for Commercial Metals ( CMC) - that could quickly change the fortunes of the famed activist who was able to return 37.4% in 2011.

On Jan. 10, Icahn's $15 tender offer for the shares of scrap metal and steel rebar giant Commercial Metals expires. Meanwhile, Icahn's recommendation to merge two of his biggest holdings in truck builders Navistar ( NAC) and Oshkosh ( OSK) will run up against a key shareholder proxy deadline at the end of January.
Carl Icahn

Pulling off both deals won't be easy, especially given the shareholder activist artist's approach leading up to the votes. While Icahn resolved a proxy threat with Navistar, he's characterized Commercial Metal's management as "Boy Scouts," with Oshkosh being little better as he pushes for his slate of directors -- and the eventual takeovers of both companies.

Not one to take a wait and see approach to investing, Icahn is pushing for immediate Commercial Metals and Oshkosh action, though both companies believe they will soon benefit from a construction recovery that will boost shares.

But Icahn isn't interested in timing a multiyear share recovery based on construction or economic trends. About Commercial Metals, Icahn told TheStreet, "We believe it's going to be business just the same over the next year or two," explaining that he doesn't want to keep his money with the company's management for such a long period of time and has little faith in their record, regardless.

Icahn's tender offer is set to expire at midnight on Jan. 10 and -- if less than 40.1% of shareholders tender their holdings -- he will withdraw his offer. Meanwhile, if he gets shareholder support, Icahn will continue with a proxy campaign as a 50% shareholder, taking the case to the Delaware Supreme Court if need be, according to a January letter. Icahn's offer represented a 31% premium to Commercial Metals' shares when the bid was made in late November. Still, it was 60% less than pre-recession levels and 2011 highs above $17 a share.

Investors who benefitted from a late year surge in Commercial Metals' stock fueled by Icahn's tender and some forecasts of a recovery in related construction and steel markets now have to decide whether to cast their lot with Icahn. In doing so, their interests may diverge with the activist, who's seen the value of his shares rise significantly to $172 million since taking a near 10% stake in the company in mid-2011, according to Bloomberg data.

"I'm trying to figure out what Mr. Icahn's threats are more than just hot air to support his underlying shares in the company," says Louis Meyer of Oscar Gruss & Sons, a brokerage. Currently, Commercial Metals shares sit near Icahn's $15 a share tender, making the offer light on economic incentive, says Meyer. He adds that, "it would be nice to see if Carl Icahn would raise his price, but chances are that's not going to happen." Meyer rates the company a "buy" with a $17 a share price target.

For more on Carl Icahn see his portfolio of stock holdings. For more on Commercial Metals see, TheStreet's portfolio of top yielding metals and mining stocks. To read about Oshkosh and Navistar shares respectively, see 6 mid cap growth stocks to watch for and David Tepper's Appalosa Management Portfolio.

Institutional shareholders like Vanguard, State Street, Dimensional Funds and Blackrock all built their 3%-plus stakes in Commercial Metals in 2010, and at much higher prices than Icahn. Those holdings reflect quarterly filings with the SEC, which may have changed . It means that while the economics of an immediate tender would favor Icahn, it may not be the case for others, who might taking a longer-term view on housing and a recovery in Commercial Metals steel rebar business for construction in coming years.

And that's where the Boy Scout issue comes in.

Icahn is pressing his case against management, which in October, announced a winding down and sale of a large steel mill in Croatia as it consolidates some complicated and unprofitable international operations. About management's new strategy and its confidence that a recovery is just beginning for Commercial Metals and the housing industry, Icahn wrote in a Jan. 4 letter, "This is not the Boy Scouts," meaning that the road for second chances has ended.

Some favor Icahn over Commercial Metals' management in the near term, while also forecasting significant value in shares over the next few years. "We continue to believe Icahn has a good chance of receiving strong shareholder support since the tender offer represents a "free" option." writes Kuni Chen of CRT Capital in a January note. Chen downgraded his rating on the company to "Fair Value," reflecting that Icahn's catalyst to share prices of $15 had ended. "Our sum-of-the-parts valuation suggests Commercial Metals could be worth up to $25 a share. Longer term, we also view Commercial Metals as a beneficiary of increased infrastructure spending and a recovery in construction," adds Chen, who says that it the tender fails, Commercial Metals shares could fall to $10.

"Though we see the potential for meaningful upside to the shares longer term when recovery occurs in CMC's key construction market, we believe this is still some time away and we expect near term earnings to disappoint expectations and model earnings below consensus for this year and next," writes Luke Folta of Jefferies in a January research note, even as he cut the company's price target to $14 a share and recommends a "hold." Ultimately, Commercial Metals shareholders have to quickly decide whether they want out of the company at $15 a share - or if they're willing to take a longer term view.

Analysts polled by Bloomberg expect that Commercial Metals will return to profitability in 2012, earning $141 million in profit after reporting two successive years of $100 million-plus losses. Meanwhile, revenue is expected to grow over 6% to $8.4 billion in 2012.

Will shareholders give management another chance, even after Icahn's boy scout call?

If Icahn were to succeed in his tender, he would sell Commercial Metals' non-core international assets and combine the remaining U.S. business with his existing majority-owned PSC Metals business, expanding its $725 million in 2010 sales by a factor of nearly tenfold with Commercial Metals' revenue.

That's where things get complicated. Like with a $10.3 billion play for Clorox ( CLX) in 2011, Icahn may simply be trying to drum up interest from a strategic buyer with his bid. If that were the case, his tender may not be looked upon so highly. Icahn was unable to win Clorox shareholder support for a slate of his directors to the company's board, which would have moved his bid forward. In September, Icahn withdrew his Clorox buyout offer and began selling shares.

Icahn will also face shareholders at the end of January in his nomination of six directors to truck-maker Oshkosh's board - which he took a near 10% share stake in June - and subsequently recommended in a December CNBC interview that the Wisconsin-based company sell itself to larger truck and military vehicles maker Navistar. That deal proposal already is complicated by a reverse in Icahn's course.

When taking a stake in Navistar starting in October, which has now grown to nearly 10%, Icahn quickly pushed for a directors to the company's board, potentially paving the way for a sale. He withdrew his nominations when Navistar agreed to declassify its board, which would allow for an unsolicited bid - not a big help to a potential merger with smaller Oshkosh.

Oshkosh has consistently resisted Icahn's directors, and hasn't expressed interest in selling itself. Meanwhile, Navistar CEO Daniel Ustain was more amenable to synergies with Oshkosh, such as its military vehicles business and pieces of its commercial businesses like its construction of cement mixers. " Some collaboration we think might be beneficial for everybody," said Ustain on a December analyst call to questions about a potential merger raised by Mario Gabelli of GAMCO Investors. To the reply, Gabelli said, " Obviously we're quite interested in your staying focused on what you're doing because you're doing a great job at" - a signal that not everyone's so negative on management guiding the company through a cyclical slowdown.

As with another previous Lions Gate Films ( LGF) takeover attempt, Icahn may not prove to win Commercial Metals and Oshkosh shareholders over - especially as his strategies aren't so clear. If the proxy's fail in January, it raises the question of whether Icahn be better off pursuing a less ambitious strategy, which fueled his 2011 gains.

Recent billion dollar plus-sized minority stakes by Icahn in El Paso ( EP) and Motorola Mobility ( MMI) netted the investment mogul impressive returns when Kinder Morgan ( KMI) and Google ( GOOG) paid big premiums for the respective companies. In those investments, Icahn pushed for specific asset spins and patent sales, respectively, which eventually yielded full sales at significant premiums. Those deals were key to his 2011 profits.

To be seen is whether a more ambitious activist slate for 2012 will yield the same results.

-- Written by Antoine Gara in New York

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