The S&A Digest: Icahn's Lear Bid on the Ropes

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Icahn's Lear Bid on the Ropes

The bidding war for Lear (LEA) is coming to a close... maybe.

Lear shareholders are due to vote June 27th on activist investor Carl Icahn's $36-a-share bid for the auto-parts supplier. Yesterday, Institutional Shareholder Services [ISS] recommended that shareholders vote thumbs-down on Icahn's bid.

While ISS's opinion is not necessarily a deathblow for Icahn, it could sway major shareholders against him.

Lear management originally accepted Icahn's bid in February, much to the dismay of Porter and Extreme Value editor Dan Ferris. At the time, the company agreed to the deal with the caveat that it was free to accept better offers if they come along. Well, they haven’t. And the clock is ticking...

Porter first recommended Lear in an old Rebound Report. In a later Digest, he labeled it the best way to invest in a turnaround in the automotive sector. In particular, he liked that Lear is the only way to play Wilbur Ross' International Auto Components Group – a privately owned company that buys bankrupt auto-parts suppliers.

Dan picked up on the topic after Icahn bid for Lear using American Real Estate Partners (ACP) – a long-time Extreme Value recommendation and Icahn's personal investment vehicle.

They came to the same conclusion... the stock is cheap, and $36 a share would be a steal.

In fact, Richard Pzena, who owns 11% of Lear, felt $36 was an insult from the very beginning. He estimates the value of the company at $60 a share. According to a letter Pzena wrote to Lear in February, Icahn agrees with that valuation. The two stalwarts had a phone conversation after Icahn bought shares in November. Both saw $4-per-share earnings potential and a $60 stock price.

In Dan's view, $36 a share represents "discounted cash flow fair value, the most you'd ever want to pay for it as a passive minority investor in a public company. Assuming that's right, the control price should be 10%-20% higher, $40-$43/share."

There could still be profits left to squeeze out of Lear. We’ll update you on the outcome of the meeting in next week’s Digest.

Good investing,

Sean Goldsmith

Baltimore, Maryland

June 21, 2007

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