Icahn Fights Back
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Carl Icahn, the famous activist investor, has been quite actively lately with several publicly-trade companies such as Take-Two, Netflix and Oshkosh Corporation (NYSE: OSK). Notably, he has issued a tender offer to acquire Oshkosh at $32.50 per share, a 15.3% premium on the current share price of $28.18. The total deal value was worth $3 billion. However, Oshkosh’s board rejected the offer, and adopted a poison pill to prevent his takeover. Oshkosh’s share price rose after the tender offer and fell after the offer was rejected. Recently, Icahn issued another letter to Oshkosh’s shareholders to respond to the board’s reaction and restate his intention.
In the letter, Icahn stated that his intention was mainly to drive Oshkosh shares up. He is a shareholder of the company, so he is totally aligned with other shareholders. He would not plan to take the company private, and he would be happy to have others join for a higher price. What is his agenda to drive Oshkosh’s stock up? As he reasoned: “While conglomerate businesses typically trade at a discount to focused companies, which is also the case here, we believe the issue at Oshkosh is much more substantial. Actual shareholders should realize that the large defense business at Oshkosh is subject to substantial uncertainty concerning future project awards, profitability, risks associated with the ever changing management to shrink the business, and the results of the recent election and subsequent budget issues.” So when he was successful in his tender offer, he would try to push for the spin off JLG, a lifting equipment business, out of Oshkosh to be a separate independent company.
JLG was acquired by Oshkosh in 2006 for $3.1 billion in cash. JLG had a broad and diverse customer base such as construction contractors, manufacturing companies, equipment rental companies, etc. In the fiscal year 2007, Oshkosh already consolidated JLG’s operating figures including $2.5 billion in sales and nearly $270 million in profits. JLG just reported its fourth quarter revenue of $716 million with operating profits of $60 million. JLG closed the full year with a 42% top line growth to $2.92 billion. So by paying $3 billion to get the whole Oshkosh, including JLG, it seems like a very sweet deal for Icahn. However, because of JLG’s significant growth and good performance, it is true that the spin-off of JLG would be beneficial for shareholders and creating an opportunity for investors in the market. Indeed, dated back in January this year, Icahn has said that JLG could be valued at $2.3 billion, or $25 per Oshkosh share.
Icahn then challenged Oshkosh management’s capability, especially Charles Szews: “It should also be noted that the year prior to Mr. Szews being appointed President and COO, the Fire & Emergency segment reported operating income of $107.5 million and in the last 12 months the segment LOST $12.9 million.” With a growing business like JLG, he couldn’t believe that when JLG has been under Oshkosh’s umbrella, in the last 5 years there were five different chiefs running it. And it was a time for a change, for shareholders to take control, having a new board with capable management teams.
As I mentioned in my previous article, activist investors or acquirers often use a ratio called EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization) to value a target. At the current price of $28.18 per share, Oshkosh’s total market capitalization is $2.58 billion, and its EV/EBITDA is only 5.93x. It seems to be the cheapest among its peers. A competitor with an equivalent size of $2.43 billion in market cap, Terex Corporation (NYSE: TEX) has its shares trading at $21.99, or 6.95x EV/EBITDA. Federal Signal (NYSE: FSS), a very small competitor, with only $337.9 million in market cap, has its shares trading at $5.42 per share, with the highest valuation of 9.36x EV/EBITDA.
Foolish Bottom Line
Personally, I think shareholders’ value in Oshkosh would be unlocked via a spin-off of JLG. The current Oshkosh’s share price would be worth JLP’s business alone. The battle between Oshkosh’s board and Icahn might drive the shares lower in the short-term. However, when $32.50 per share understates the company’s intrinsic value, long-term investors might consider Oshkosh as a position in their diversified portfolios.
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