Tenneco Inc. is negotiating to sell its automotive unit in a deal that could create a $5.1 billion automotive megasupplier.
Tower Automotive Inc. is the leading contender to acquire the much larger Tenneco Automotive, a supplier of suspension and exhaust systems, said two sources familiar with the deal.
Tower, a dark horse during most of the six months of talks, overtook three larger contenders by structuring a complex proposal that minimizes the tax penalty of a sale, according to people familiar with the deal.
The sale will split Tenneco's packaging unit from its automotive division, eliminating still another conglomerate from the highly competitive auto parts industry.
A deal would position the fast-growing Tower, of Grand Rapids, Mich., as a key supplier of a vehicle's 'corners,' which include the suspension, brakes and wheels. Tenneco's shock absorbers and struts would complement Tower's suspensions and structural stampings.
'Tower wants to get the deal done,' said automotive analyst Darren Kimball of Lehman Brothers in New York. Wall Street would be happy, he said, if Tower paid no more than $3.3 billion.
The impending sale follows Tenneco's uphill effort to become a major supplier of vehicle corners.
CORNERING THE MARKET
Over the past three years, at least six major suppliers have begun marketing their ability to design and produce corner modules.
They include Delphi Automotive Systems Corp.; TRW/LucasVarity PLC.; Hayes Lemmerz International Inc.; Continental AG; and Dana Corp.
A Tower spokesman declined to comment. Neil Geary, a Tenneco Inc. spokesman, said only that the company is actively exploring a range of options for both Tenneco Automotive and Tenneco Packaging.
Tenneco Automotive, which is based in Lake Forest, Ill., began its effort in 1996 when it formed a joint venture with ITT Automotive. Later, Benteler Automotive of Paderborn, Germany, joined the venture, and the three partners integrated their parts into a corners strategy. Benteler designed chassis components, Tenneco supplied suspensions, and ITT produced brakes.
Last year Tenneco upped the ante by trying to acquire ITT Automotive's brake-and-chassis division. The $2.2 billion business would have made Tenneco a top player in this evolving market segment. But Tenneco failed.
Soon after, parent Tenneco Inc. retained Goldman, Sachs & Co. to auction its automotive group, according to one source.
Although Tenneco Automotive failed to land ITT, it remains a major player in North America. Sales of original equipment amounted to 61 percent of its $3.2 billion in sales. Tenneco ranks 31st on Automotive News' list of top North American suppliers.
Each of the 10 best-selling trucks in North America carries Tenneco components, a company spokesman says.
Eleven of the world's 15 best-selling cars also feature Tenneco products, according to the company. Tenneco also has built a brand identity in the aftermarket with Walker exhausts and Monroe shocks.
Tenneco Inc. CEO Dana Mead has hinted for months he might split off the company's automotive operations as a means of providing value to his suffering shareholders.
Currently, Tenneco Inc.'s share price is languishing near its 52-week low of $27.96. The company's original-equipment automotive group is strong, but the replacement parts business has suffered.
Last week, Mead sold Tenneco's container board business for $2.2 billion, a move he called the first step in Tenneco's strategic restructuring.
In February, he told Barron's that he would like to focus on his container business, which makes Hefty trash bags and Baggies plastic bags, and sell his automotive group. He put its value at $4 billion.
Insiders say Mead examined at least three ways of selling Tenneco Automotive. If he takes cash, he and other Tenneco shareholders would incur a hefty tax bill.
'There is no point in selling for $4 billion if you have a multibillion-dollar gain and have to pay tax on it,' said a source familiar with the deal.
Mead's second choice is a tax-free spinoff to shareholders. But it offers less certainty for long-term success than Tower's proposal.
'REVERSE MERGER' POSSIBLE
Tower wants a tax-free 'reverse merger,' said one source. A reverse merger, a rarely used strategy in which Tenneco could be the surviving entity, is the opposite of a conventional merger, in which Tenneco Automotive would have disappeared into the acquiring company.
In this reverse merger, Tower would gain control because it would put its own executives in charge.
'No one thought about Tower on Day One,' a second insider said of early talks. 'But they were the most aggressive and they structured a deal that made financial sense.'
A Tenneco-Tower deal presents less risk than other options. It would create a larger company with pro forma sales of $5.1 billion, a solid investor base and a business with a following among research analysts, analysts said.
That's important because publicly traded Tower is less well known than Tenneco Automotive. Tower has enjoyed 20-fold growth of sales since it was founded in 1993. In 1997, Tower paid cash for its
$625 million A.O. Smith acquisition.
Can Tower, which last year had sales of $1.8 billion, afford $3 billion or more for Tenneco? Yes, said Eric Goldstein, a Bear, Stearns & Co. Inc. analyst. 'Tower can afford to do the deal because it would be a cash and stock deal, not all cash.'
Tower may be based in Grand Rapids, but it brings big-city financial sophistication to the bargaining table. Tower has ownership and organizational ties to the partners of Hidden Creek Industries, a privately held industrial management company headed by S.A. 'Tony' Johnson and based in Minneapolis.
Johnson is a veteran buyout artist. Last week, Hidden Creek agreed to acquire a controlling interest in J.L. French Automotive Castings Inc. of Sheboygan, Wis.
Johnson and Hidden Creek's other partners acquired Tower in 1993. Earlier, they bought Dura Automotive Systems Inc. and Trim Systems Inc. In 1990 they formed Automotive Industries Inc. and sold it five years later to Lear Corp.