Tenneco buying Federal-Mogul for $5.4 billion, plans to split into two separate companies

Tenneco buying Federal-Mogul for $5.4 billion, plans to split into two separate companies

The merger-and-split strategy follows Carl Icahn's long-stated plans for Federal-Mogul, creating standalone OEM and aftermarket businesses.

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April 11, 2018
By Robert Schoenberger
Cars/Light trucks Commercial vehicles Components Manufacturing Powertrain

Cleveland, Ohio – Two of the largest Tier 1 automotive suppliers are merging and splitting apart at the same time. Tenneco, manufacturer of ride performance and air purification equipment, has agreed to buy Federal-Mogul, maker of powertrain components and aftermarket equipment, for $5.4 billion in cash, stock, and the absorption of debt.

Following that merger, Tenneco will split itself into two separate publicly traded companies – one focused on air cleaning components from Tenneco and powertrain parts from Federal-Mogul, the other focused on aftermarket parts from Federal-Mogul and Monroe shock absorbers and other ride comfort equipment from Tenneco.

The acquisition is expected to close in the second half of 2018, subject to regulatory and shareholder approvals and other customary closing conditions, 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,” says Tenneco CEO Brian Kesseler. “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.”

Federal-Mogul is owned by Icahn Enterprises, a fund managed by activist investor Carl Icahn. Icahn built up his stake in Federal-Mogul throughout several years, starting with investments in its debt and moving to equity.

“Icahn Enterprises acquired majority control of Federal-Mogul in 2008 when we saw an out-of-favor market opportunity for a great company. 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,” Icahn says.

Icahn had planned to split Federal-Mogul without Tenneco’s involvement. In 2014, he released a plan to separate that company’s powertrain business from its aftermarket properties. At the time, analysts called it a move to prepare the separate divisions for public stock offerings that would have allowed Icahn to reap the benefits of his investments in the supplier.

However, investors showed little appetite for the separated companies, and Icahn delayed the separation, giving it a mid-2015 target date that Federal-Mogul also let pass without separating. In early 2016, he announced that Federal-Mogul would remain a united company but would market its various divisions separately.

Combining the split pieces of Federal-Mogul with pieces of Tenneco, however, is winning more praise from investors. Stock values in Icahn Enterprises and Tenneco both rose Tuesday.

Merging Tenneco’s ride performance business with Federal-Mogul’s motorparts business will establish a $6.4 billion global aftermarket company (based on 2017 sales for each partner) with brands that include:

  • Monroe
  • Walker
  • Wagner
  • Champion
  • Fel-Pro
  • MOOG

The $10.7 billion (in 2017 sales) powertrain technology company will be one of the largest pure play powertrain suppliers. The combined business will offer products and systems from the engine to the tailpipe that can improve engine performance and meet tightening criteria pollutant regulations and fuel economy standards.

Executives say the merger and split will give both parts of the company greater scale, helping them compete in a global market. That scale should give both companies more resources to invest in developing markets such as autonomous driving and drive comfort enhancements.

“Today’s announcement is an extension of Tenneco’s proven strategies for delivering profitable growth and will accelerate each company’s ability to capitalize on trends that are fundamentally changing our industry,” says Gregg Sherrill, executive chairman of Tenneco. “This is a major step forward in building an even stronger position with the combination of strategically aligned companies and the subsequent separation of the businesses, realigned in such a way to unlock shareholder value.”

Tenneco will acquire Federal-Mogul for $5.4 billion through a combination of $800 million in cash, 5.7 million shares of Tenneco Class A common stock (representing a 9.9% voting interest), 23.8 million shares of non-voting Class B common stock and assumption of debt. Tenneco has put in place committed debt financing to fund the transaction, which will replace Tenneco’s existing senior credit facilities and certain senior facilities at Federal-Mogul.

About the author: Robert Schoenberger is the editor of Today's Motor Vehicles and a contributor to Today's Medical Developments and Aerospace Manufacturing and Design. He has written about the automotive industry for more than 18 years at The Plain Dealer in Cleveland, Ohio; The Courier-Journal in Louisville, Kentucky; and The Clarion-Ledger in Jackson, Mississippi.

rschoenberger@gie.net