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Apollo, Carlyle, Other Suitors Cool to Federal-Mogul Deal as Share Price Surges

NEW YORK, April 18 (Reuters) – Private equity firms Apollo Global Management and the Carlyle Group are interested in buying Federal-Mogul Corp., but the recent run-up in the company’s share price has made suitors skittish and a deal is far from certain, people familiar with the matter said.

Several other buyout firms including Bain Capital, Blackstone Group and Canada’s Onex were initially interested in the U.S. auto parts supplier but are no longer pursuing it, all seven sources said. Strategic bidders such as Robert Bosch [ROBG.UL] declined to participate in the process, two of the sources said.

The sources declined to be named because details of the auction are not public.

Apollo and Carlyle submitted initial bids for Federal-Mogul at the end of March and remain in the auction for the company, owned by billionaire investor Carl Icahn, six of the sources said.

It is not clear if there is any other bidder for Federal-Mogul. The supplier, based in Southfield, Michigan, emerged from bankruptcy in December 2007 under the control of Icahn, who owns a 76 percent stake and is nonexecutive chairman of the board.

The private equity buyers are lukewarm over valuation and there is a good chance that the current process may not result in a transaction, all of the sources said.

Federal-Mogul confirmed last month that it had retained Lazard Ltd to review a potential sale of the company. Federal-Mogul shares have gained more than 6 percent, valuing the firm at nearly $2.5 billion, since Reuters first reported on March 7 that the company was exploring a sale.

More than one bank has offered financing at 5 times earnings before interest, tax, depreciation and amortization (EBITDA), two of the sources said, implying a sale price at more than 7 times EBITDA. Auto supplier assets generally sell for 5 to 6 times EBITDA and the financing level offered for Federal-Mogul has concerned potential buyers.

“I think it’s already trading higher than the bidders want to pay, which is why people are so lukewarm,” one source said.

Representatives for Federal-Mogul, Carlyle, Blackstone, Onex and Bain were not available to comment. Apollo declined comment.

Private equity firms are starting to show renewed interest in the auto sector after having avoided it during the recession. The sector is showing signs of recovery despite higher oil prices and a slow rebound in consumer spending.

Still, buyout firms remain cautious about investments in that industry because of its cyclical nature and doubts over whether it has changed enough to sustain sales in weak economic environments.

Federal-Mogul has long term debt of about $2.8 billion, meaning a deal value including debt, or enterprise value, could exceed $5 billion.

While debt markets are recovering, the size of leveraged buyouts is typically in the $1 billion to $3 billion range, despite banks’ willingness to provide capital for deals.

In 2005-2007, before the recession, a number of double-digit billion dollar deals were struck.
U.S.-targeted LBO activity in the first quarter of 2011 captured 6.1 percent of total U.S.-targeted M&A activity compared with 15 percent in the previous quarter, Thomson Reuters data show. The $3 billion buyout of Emergency Medical Services was among some of the larger deals.

Buyout firms have been outbid in auctions for companies by so-called strategic bidders, companies in the same sector as the target, which are flush with cash and can pay more as they can extract cost savings from merging assets.

In the case of Federal-Mogul, rival part makers have shown little interest, giving private equity an advantage.

(Reporting by Soyoung Kim and Megan Davies)