Goldman: Tenneco's Federal-Mogul Acquisition Fails To Address Investor Concerns

Tenneco Inc TEN's proposed $5.4-billion acquisition of Icanh Enterprises LP IEP-owned Federal-Mogul is likely to be accretive to its earnings per share, but the deal fails to address two ongoing investor concerns, according to Goldman Sachs.

The Analyst

Goldman Sachs' David Tamberrino downgraded Tenneco's stock rating from Buy to Neutral with a price target lowered from $64 to $62.

The Thesis

A strategic rationale exists for Tenneco to acquire Federal-Mogul, including at least $200 million in annual run rate synergies, EPS accretion of 1-13 percent and the creation of two distinct entities with larger scale, Tamberrino said in the downgrade note.

But the deal falls short of satisfying two major investor concerns, the analyst said:

The deal would still leave Tenneco with a lack of exposure to pure battery-electric vehicle content, Tamberrino said. The lack of exposure to the growing car segment will likely weigh on Tenneco's long-term growth outlook.
The combined company would have a high exposure to unindexed raw material cost headwinds, according to Goldman Sachs. The higher exposure prompted the analyst to lower the 2018-2020 EPS forecast due to an additional headwind from steel cost inflation. The analyst's new 2018 EPS forecast of $7.18 factors in an additional steel headwind of $45 million and stands 6 percent below the Street estimate of $7.64 per share.