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 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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