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Activist funds criticize Lear's valuation

by Lou Whiteman  |  Published February 12, 2013 at 12:52 PM
Auto parts maker Lear Corp. is under pressure from a pair of funds that have teamed up to push the company to take actions to boost its stock price.

Marcato Capital Management LLC of San Francisco and New York-based Oskie Capital Management LLC, which together own about 5.6% of Lear's shares, in a Tuesday letter to the board outlined their concerns about the company's valuation. The funds also made a series of suggestions to unlock value, and pushed for a meeting with members of Lear's board.

Southfield, Mich.-based Lear is a manufacturer of automotive seat systems and other components that reported Ebitda of $936.7 million on sales of $14.57 billion in 2012.

The company was one of a number of auto parts makers hard hit by the Great Recession, emerging from bankruptcy in November 2009.

The funds in their letter said they have "serious concerns about the current board's sense of urgency and alignment of interests" with shareholders, calling for a board overhaul. The group would also like to see the board look to a $2 billion share repurchase program, and a review of the company's growth capital expenditure budget along with its acquisition and divestiture strategy.

The investors praised the streamlining work Lear did while in Chapter 11 protection, saying the company "is well positioned to generate significantly improved margins." However, the group said that Lear is "dramatically overcapitalized," resulting in Lear's stock trading at a discount to its peers and its long-run historical multiple of 5.5 times Ebitda.

"We see what we believe to be a serious discrepancy between Lear's improved operating performance and business prospects and its current market valuation," the investors wrote. "We believe the company's current undervaluation reflects investors' distaste for the company's practice of stockpiling an increasing net cash balance, along with concern that the company may be willing to make costly acquisitions or invest in other low-return projects at a time when the repurchase of Lear's undervalued stock would be far more accretive to the long-term equity value of the company."

Lear management and directors seem to at least share the investors view that the shares are trading at a discount. Lear in a statement said it was "focused on value creation for all shareholders," saying the company was taking "a balanced strategy" of investing in the business and returning cash to shareholders.

The company last week said it was increasing the pace of its $1 billion share repurchase program and increasing its dividend by 21%.

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Tags: bankruptcy | Chapter 11 | Ebitda | Lear Corp. | Marcato Capital Management LLC | Oskie Capital Management LLC

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Lou Whiteman

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