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April 11, 2018 12:30 PM, EDT
Carl Icahn’s $5.4 Billion Exit Strategy Soothes Auto Parts Retailers
Federal Mogul HQ Federal-Mogul Headquarters (Federal-Mogul)

It’s hard to be frenemies in business.

Carl Icahn is selling auto-parts maker Federal-Mogul to competitor Tenneco Inc. for $5.4 billion. Part of the reason is that Federal-Mogul’s own customers — retailers such as AutoZone Inc. and O’Reilly Automotive Inc. — bristled at the billionaire investor being both their supplier and competitor through his many auto-related holdings, people familiar with the situation said. Icahn owns distributors such as Auto Plus and retail shops such as Pep Boys, meaning it sells to everyday customers and to repair shops.

Icahn

Icahn

The sale is a step backward in Icahn’s goal to gain greater control of the replacement-parts business amid sweeping changes in the U.S. mobility sector.

The investor has acquired a collection of transportation-related assets — including a stake in ride-sharing operator Lyft Inc. and a controlling position in rental-car provider Hertz Global Holdings Inc. — as he expects Americans to increasingly forgo owning cars.

Becoming a dominant maker and distributor of parts needed to service today’s cars and those future fleets, and installing them at his own repair chains such as Aamco and Precision Auto Care, would have helped solidify his position throughout the supply chain. A spokesman for Icahn Automotive did not immediately reply to a request for comment on what the unit sale means for the billionaire’s parts and repair business.

Deal Structure

Even the structure of the deal helps keep Icahn and his auto businesses at arm’s length from the Federal-Mogul unit bought by Tenneco. The purchase price includes an $800 million cash payment and 29.5 million shares of Tenneco, including nonvoting stock, the companies said April 10 in a statement. Icahn also will have a combined 36% of Tenneco’s voting and nonvoting stock.

Once the deal goes through, Lake Forest, Ill.-based Tenneco will split the combined businesses into two publicly traded companies to better compete in the shifting transportation space. One will specialize in powertrain technology and the other in auto parts. Icahn will retain a board seat at the powertrain company, but not the parts company.

Tenneco — which will sell a broader range of parts after the combination — still will do business with Icahn’s companies; he just won’t have control the way he did as owner of Federal-Mogul. Icahn also still plans to push ahead with growing its own retail and distribution business and using Hertz to help manage cars for Lyft drivers, said one source familiar with the arrangement.

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Industry Shift

Tenneco shares climbed as much as 8.4%, the biggest intraday jump since April 2016.

The sale marks the latest shift in a car-parts industry that is reorganizing as automakers prepare for an era of battery-powered and eventually driverless vehicles. Icahn made a move last year to sell Federal-Mogul’s Fel-Pro engine-parts unit, a business it has owned since 1998. Tenneco was among suitors for some businesses of Fiat Chrysler Automobiles NV’s Magneti Marelli components division as the Italian-American manufacturer prepared to spin off that unit.

The Federal-Mogul acquisition is expected to close in the second half of 2018, with the Tenneco split to take place in the second half of next year.

‘Tremendous Value’

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

Tenneco is taking after several peers by splitting itself up. Aptiv and Delphi Technologies formed as a result of the former Delphi Automotive breaking up last year. Autoliv Inc., the Swedish-American air bag and seat belt maker, is spinning off its driverless-electronics business, and Germany’s Continental AG is considering a shakeup of its structure.

With assistance by Tom Lavell.