Icahn Enterprises (IEP), the conglomerate headed up by billionaire activist investor Carl Icahn, is reportedly selling auto parts manufacturer Federal Mogul. According to CNBC, the trade is being made with rival auto parts maker Tenneco Inc. (TEN). Tenneco will buy Federal Mogul for $5.4 billion in cash and stock. Following completion of the deal, the report suggests, Tenneco plans to separate the combined companies into two distinct stocks as part of a tax-free spinoff, with one company focused on "aftermarket and ride performance," while the other focuses on "powertrain technology."

Icahn Expects Relationship to Continue

In a statement regarding the deal, Icahn indicated his expectation that his investment relationship with Tenneco would remain into the future. "We expect to be meaningful stockholders of Tenneco going forward and are excited about the prospects for additional value creation," he said. "This transaction is an excellent example of our general modus operandi at Icahn Enterprises, by which we seek to acquire undervalued assets, nurture, guide and improve their condition and operations, and ultimately develop them into more valuable businesses, which greatly enhances value for all shareholders."

Icahn Enterprises is slated to receive $800 million in cash and 29.5 million TEN common shares as a part of the deal. The equity value of the deal is $2.4 billion, considering that Federal Mogul had gross debt of $3.1 billion. Icahn first bought convertible bonds in Federal Mogul in 2001, investing $1.1 billion in the company. He eventually took it private last year, completing the purchase of the final 18% of the company which he did not own. It is expected that the deal will generate $200 million in annual earnings as well as $250 million in working capital.

Long-Term Prospects

A report by Reuters suggests that "the new bulked up powertrain technology company will likely benefit from the fact that internal combustion engine parts and tailpipe exhaust scrubbing technology will be needed by automakers for a long time to come," considering that fully electric cars and other alternatives still remain a distant goal. At the same time, Tenneco's second company, the aftermarket parts manufacturer, should provide a cash flow that is potentially steady.

B. Riley analyst Christopher Van Horn suggested that this deal could be seen as the latest move in a series of consolidations among auto suppliers. On the news of the deal, TEN stock rose by 5.8% to $58.78 per share, while IEP shares climbed by 2.7%, reaching up to $61.29.

Tenneco Executive Chair Gregg Sherrill expressed excitement over the deal, suggesting that "going to market with well-recognized brands, more product categories, greater coverage and expanded distribution capabilities is a strong formula for capturing growth, particularly in China."