Mercato, Oskie Send Letter to Lear Board, Urge CapEx Review, Buyback Plan, Buy/Sell Strategy
Marcato Capital Management LLC (“Marcato”) and Oskie Capital Management LLC (“Oskie”) (together with their affiliated investment funds, “the Group”), announced today that they have sent a letter to the Board of Directors of Lear Corporation (NYSE: LEA) (“Lear” or “the Company”) outlining concerns around the Company's valuation, describing the Group's ideas for potential value-creating initiatives and reiterating the Group's interest in meeting with members of the Board.
The full text of the letter follows:
Marcato Capital Management LLC Oskie Capital Management, LLC
One Montgomery Street, Suite 3250 10 East 53^rd Street, 31^st Floor San Francisco, CA 94104 New York, NY 10022
Telephone Number 415-796-6350 Telephone Number 646-450-0095
February 12, 2013
Mr. Henry Wallace, Chairman of the Board Mr. Matthew J. Simoncini, President, Chief Executive Officer and Director Mr. Thomas P. Capo , Nominating and Corporate Governance Committee Chairman Mr. Jonathan F. Foster Ms. Kathleen A. Ligocki Mr. Conrad L. Mallett, Jr., Compensation Committee Chairman Mr. Donald L. Runkle Mr. Gregory C. Smith, Audit Committee Chairman c/o Lear Corporation 21557 Telegraph Road Southfield, MI 48033
Dear Members of the Board of Directors,
Investment funds affiliated with Marcato Capital Management and Oskie Capital Management are significant stockholders of Lear Corporation (the “Company”), with holdings together representing beneficial ownership of approximately 5.6 percent of Lear's outstanding common equity. We share the view expressed in the Company's press release of February 7, 2013 that the Company is undervalued, and we see what we believe to be a serious discrepancy between Lear's improved operating performance and business prospects and its current market valuation. It is our view that this discount is directly linked to a questionable capital allocation strategy by the Board. Specifically, we believe the Company's current undervaluation reflects investors' distaste for the Company's practice of stockpiling an increasing net cash balance, along with concern that the Company may be willing to make costly acquisitions or invest in other low-return projects at a time when the repurchase of Lear's undervalued stock would be far more accretive to the long-term equity value of the Company.
It is therefore no surprise to us that Lear's stock is trading both at a significant discount to its peers, and well below its long-run historical multiple of 5.5X EBITDA.
It is our contention that the Company's recent announcement – to accelerate the pace of its existing stock repurchase program and raise its dividend – is insufficient. Simply put, we view Lear as dramatically overcapitalized. With net cash of almost 1x EBITDA, we believe Lear is approximately 2x full turns of leverage below the average of a group of its peers – despite Lear's lower capital intensity, better pension liability position, favorable tax advantages and higher free cash flow conversion. Further, Lear's large cash balance has the effect, we believe, of increasing the Company's equity value, thereby artificially inflating the Company's P/E multiple and distorting the value of the core enterprise.
The Board's choices regarding capital allocation appear parsimonious and are even more disappointing in light of the positive operational progress the management team has made during and since emerging from Chapter 11 reorganization. The Company is now more diversified by geographical end-market and customer mix, and with its strong competitive position in its core seating business and a lower fixed cost base, we believe the Company is well positioned to generate significantly improved margins for a given level of production.
We note that the Board has de minimis ownership of the Company's shares.
All of this gives us serious concerns about the current Board's sense of urgency and alignment of interests with the Company's owners. We are aware that our concerns are shared by a number of other large stockholders, and are of the impression that there has been little action taken, despite these concerns having been voiced directly to members of the Board on multiple occasions in the past. Accordingly, we believe that it is important to add new Board members who will bring focus and urgency to the implementation of potential value-creating initiatives, including:
* The immediate commencement of a $2 billion share repurchase program to both take advantage of the current valuation discount, and establish a more appropriate capital structure in-line with other prudently capitalized industry participants; and * A review of the Company's growth capital expenditure budget and acquisition and divestiture strategy, to ensure that stockholder capital is being directed to those areas that offer the highest possible long-term return.
We reiterate that we are interested in having a constructive dialogue with Mr. Wallace, Mr. Simoncini and the other directors regarding this positive program for value creation.
Sincerely, MARCATO CAPITAL MANAGEMENT LLC By: /s/ Richard T. McGuire Name: Richard T. McGuire Title: Managing Member OSKIE CAPITAL MANAGEMENT, LLC By: /s/ David Markowitz Name: David Markowitz Title: Managing Member
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