Carlyle to Buy Illinois Tool Unit for $3.2 Billion

Carlyle Group LP (CG), the world’s second-biggest manager of alternative assets such as private-equity funds and real estate, agreed to buy the industrial-packaging business of Illinois Tool Works Inc. (ITW) for $3.2 billion.

Carlyle will contribute equity for the deal from its Carlyle Partners VI fund, which closed with $13 billion in November, according to a statement today from the Washington-based firm. Illinois Tool will use the proceeds to help finance a planned buyback of about 50 million shares by year-end to offset the dilution of per-share earnings, the company said in a separate statement.

Carlyle has acquired parts of large corporations since it was started in 1987 by Bill Conway, Dan D’Aniello and David Rubenstein. Last month, the firm agreed to buy the Ortho Clinical unit of Johnson & Johnson (JNJ) for $4.15 billion with the intent of operating the blood-diagnostics business as an independent entity.

The packaging unit “is a highly diversified business with strong management, attractive market positions and excellent free cash flow,” Brian Bernasek, a Carlyle managing director, said in the statement from the firm. “We look forward to helping IPG achieve its full potential as it transitions to a standalone company,” he said, referring to the unit’s name, Industrial Packaging Group.

Business Review

Illinois Tool crafted its divestiture strategy after Ralph Whitworth’s Relational Investors LLC took a stake in 2012 and pushed for increased profit. In October 2012, Illinois Tool completed the $1.1 billion sale of a 51 percent stake in its decorative-surfaces division.

Today’s deal capped a review of the packaging business’s future that included Illinois Tool’s hiring of JPMorgan Chase & Co. and Goldman Sachs Group Inc. in February 2013 to study options including a sale or spinoff. The unit makes steel, plastic and paper packaging for transporting goods.

In October, Illinois Tool said it would start reporting results as discontinued operations. The company’s 2013 sales totaled $14.1 billion, down from $17.9 billion in 2012.

The industrial-packaging business had $282 million of operating income in 2012, the most recent year before results were classified as discontinued. That constituted 9.9 percent of the company’s operating income that year, according to Illinois Tool’s regulatory filings.

Carlyle Carve-Outs

Illinois Tool rose 0.7 percent to $78.12 at the close of trading in New York, ahead of the sale announcement. The stock has gained 25 percent in the past year, beating the 17 percent advance for the Standard & Poor’s 500 index of large U.S. companies.

One of Carlyle’s largest deals ever was a carve-out from a corporation. In 2005 the firm teamed with Bank of America Corp. and private-equity firm Clayton Dubilier & Rice LLC to buy rental-car business Hertz Corp. from Ford Motor Co. for $15.1 billion, including debt. The investors sold the last of their Hertz shares last year.

Carlyle became the most active private-equity firm in 2012 in part by purchasing units of large companies. That year, it struck a $4.9 billion deal for DuPont Co.’s auto-paint unit and a $3.5 billion buyout of United Technologies Corp.’s Hamilton Sundstrand industrial unit.

In addition to JPMorgan and Goldman Sachs, Illinois Tool received advice for today’s deal from Latham & Watkins LLP. Carlyle said it was advised by Kirkland & Ellis LLP. The companies expect the buyout to close in the middle of the year.

To contact the reporters on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net; J. Kyle O’Donnell in New York at jodonnell49@bloomberg.net; David Carey in New York at dcarey13@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Christian Baumgaertel at cbaumgaertel@bloomberg.net

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