Lear Rejects Marcato’s Idea For Electrical Spinoff

During last week’s shareholder meeting, Lear (LEA) CEO Matt Simoncini said the company would not be pursuing a spinoff of its electrical business after determining that it would destroy value and eliminate synergies. The breakup idea first surfaced in early February when Mick Mcguire’s Marcato Capital sent a letter to the board urging the company to consider spinning off its electrical unit which, as its name implies, supplies electrical systems to auto OEMs. The fund felt the company wasn’t being properly valued in its current form as the electrical business has higher margins and faster growth than the company’s dominant seating business. Mr. McGuire indicated a breakup could make the company worth as much as $145 per share, representing quite a significant premium at the time. Here is a Forbes writeup looking at a potential breakup which also saw some nice upside in the idea.

Management quickly responded to Mr. Mcguire’s letter, noting that the company has a strong (recent) track record of returning capital and delivering returns, but that it was open to considering all ideas. After reviewing the idea for a few months, the company felt it was ‘stronger and better able to create future value’ by keeping both segments in house. The presentation by the company notes that the businesses can be valued independently as is and that they:

– Share common customers (about 95%) and global infrastructure

– Require similar operating skills

– Share talent between the two segments

– Leverage the same core capabilities

That wasn’t the end of management’s spinoff rebuttal though as the presentation continued explaining why management did not recommend a spinoff:

– Increasing product synergy with Seating, especially as seats become more intelligent and require more programming and electronics

– Significant foreign tax leakage, added infrastructure costs and other negative s nergies synergies

– Competitive and operating risks associated with separation

Message received. The decision is a clear rejection of Marcato’s idea and quite a different outcome from the pair’s last melee back in 2013. At that time, the company quickly caved to Marcato’s pressure for increased buybacks and appointed a mutually agreed upon director in order to avoid a proxy battle with the firm. The firm agreed to a two year ‘cease fire’ at the time, which just recently expired. It sure didn’t take long to get reengaged in battle!

The auto industry is well known for its cyclicality meaning auto suppliers’ results can fluctuate wildly. It feels like ancient history, but even Lear had to enter Chapter 11 back in 2009 to fix itself. The industry is well covered though so it’s hard to really understand the existence of a ‘conglomerate’ discount being applied to a company for having two different product categories with close to 100% customer overlap. There could be different balance sheet requirements allowing for some financial engineering, but in the end, it seems management decided it’s not worth pursuing. Marcato – your move. This could get interesting.

Disclosure: Author holds no position in any stock mentioned.