Breakup: Activist fund looking to split Lear

Lear headquarters in Southfield, Mich.
Jeff Kowalsky | Bloomberg | Getty Images
Lear headquarters in Southfield, Mich.

Nearly three years after taking a substantial stake in the auto supplier Lear, the activist hedge fund Marcato Capital Management is agitating for a breakup.

In a letter to Lear management dated Tuesday, Marcato founder Mick McGuire argues that the company should separate its two key business units—its electrical division and its seating division—into two independently traded public entities.

Such a move, wrote McGuire, would separate "a faster-growing, higher-margin business with secular tail winds that we believe deserves a higher multiple"—the electrical business—from its slower-growing seating business counterpart.

The action could result in a combined value of $145 per share—a level 45 percent above the company's recent share price, McGuire added.

"Given the substantial value to be created by a separation, we believe it is the board's and management's responsibility to explore the opportunity," he wrote, offering that "the current share price is clearly well below what is readily achievable."

Marcato's letter, which someone familiar with the matter said was sent to Lear's chief executive, Matt Simoncini, on Tuesday morning, arrives at a time when the auto supplier appears to be thriving.

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"The board and the management at Lear takes all input from our shareholders very seriously and of course we will evaluate his proposal," a company spokesman said. "We believe we're following a balanced strategy that includes investing in our business, pursuing complementary acquisitions, maintaining a strong and flexible balance sheet, and returning cash to our investors."

On Friday the Southfield, Michigan, company posted better-than-expected fourth-quarter net income of $262 million, helped by strong demand from both China and North America. Its full-year results marked a fifth consecutive year of sales growth, and its guidance for 2015 was upbeat. Lear's shares have risen 42 percent over the last year.

A spokesman for Lear was not immediately available for comment.

The Lear letter is the latest activist wager by Marcato, the San Francisco based hedge fund that was founded in 2010 by McGuire, an alumnus of Bill Ackman's Pershing Square Capital Management. In recent years, Marcato, which manages $3 billion in assets and returned 5.3 percent in 2014, has adopted an assertive but typically cordial stance toward its targets.

Marcato recently boosted his Lear stake by 2.5 million shares, according to public filings, bringing its total ownership in the auto supplier to about 4.6 percent of the company's stock.

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In a 2013 investor presentation, for instance, McGuire argued for an aggressive share buyback, property sales and other operational tweaks at Sotheby's, where he had taken a position. His approach stood in contrast to the poison-pen tact favored by Third Point founder Dan Loeb, who had also gone active on the auction house. More recently, McGuire argued in a November letter that the lodging company InterContinental Hotel Group should explore a merger.

Lear, for its part, has fended off activist interventions before.

In 2007, it beat back a buyout offer of nearly $3 billion from an entity affiliated with the sharp-tongued investor Carl Icahn. And in early 2013, Lear averted a proxy fight with Marcato and another investor, Oskie Capital Management, by acquiescing to a more robust share-repurchase program and adding a new director to its board on which the two activists agreed.

Share buybacks will now be at issue for Lear again. In Tuesday's letter, McGuire requested an "immediate" share repurchase plan of $1 billion, a maneuver he believes "would leave [Lear's] balance sheet extremely well-capitalized," and with minimal leverage, as it considers a potential split.