Federal-Mogul Holdings Corp (NASDAQ:FDML) shares skyrocketed by as much as 46% today to $7.63 after trading on them resumed. Trading on the stock was halted at just under $5 per share pending news, and now we know the news was that activist investor Carl Icahn’s Icahn Enterprises has entered a bit to acquire the rest of the company his firm doesn’t own.
Icahn Enterprises shares also climbed this morning, surging by as much as 7.34% to $61.60 following the release of the Federal Mogul news. It’s been a rough couple of weeks for the firm as ten days ago, Standard & Poor’s said it could cut its credit rating to junk.
Carl Icahn bids to acquire Federal Mogul
Icahn’s firm has bid $7 per share in cash for the 18% of Federal Mogul it doesn’t own, which amounts to approximately $213 million, reports Reuters. It also slaps a value of about $1.2 billion on the auto parts manufacturer. As of Friday, the company was only worth $842 million. Icahn was Federal Mogul’s chairman but stepped down from that position last year, according to The New York Times. Federal Mogul intends to form a special committee to evaluate the offer from Icahn’s firm.
The company also released its fourth quarter earnings report this morning, posting adjusted earnings of 22 cents per share, which beat consensus at 12 cents, and $1.8 billion in revenue, which was in line with consensus. Federal Mogul posted a GAAP loss of 36 cents per share.
Icahn Enterprises has been seeking to expand its auto business since last year, and it won a bidding war with Japanese tire manufacturer for Pep Boys. The acquisition for the auto parts retailer closed earlier this month.
Federal Mogul was undervalued
Seeking Alpha contributor Munger Fan believes that before Carl Icahn’s bid, the markets were “probably” valuing Federal Mogul “unreasonably low.” By acquiring the rest of the auto parts manufacturer, Icahn will have more control over acquisitions, financing and other aspects of the business in addition to expanding his auto business. Auto sales were strong last year as gas prices remained low.
Munger Fan even thinks the $7 per share offer from Icahn Enterprises is “a bit of a low ball offer,” noting that the company rakes in about $7 billion in annual revenue. He thinks one of the reasons the markets have been so bearish on Federal Mogul was because the company canceled its planned spinoff of its motor parts division, which he said should have revalued the company’s stock price.
Further, he noted that it has used much of its leverage with $2.8 billion in net debt, and he suggests that the markets may be worrying that auto demand has peaked and remain concerned about uncertainties in the world’s currency exchange rates.
Do investors see a higher bid coming?
His question is whether Federal Mogul investors will actually accept Icahn’s offer, however, and as the markets pushed the company’s stock over the $7 per share that was offered, he may be right. He suggests that $8 to $9 “would not be a stretch of imagination,” although of course investors would have to play ball to see if they can garner that much.
Another factor is Mario Gabelli’s GAMCO, which holds about a 4.63% stake in the auto parts manufacturer. Munger Fan estimates that GAMCO controls about 25% of shareholders who are not affiliated with Icahn, which means that Gabelli will have a lot of say in whether Icahn’s bid is accepted. Only shareholders who aren’t affiliated with Icahn will be able to vote.