Relational Said to Urge Paring of Illinois Tool Business Units

Ralph Whitworth’s Relational Investors LLC, which may take a seat on Illinois Tool Works Inc.’s board, is urging the company to pare business units and cut purchasing costs, a person familiar with the talks said.

The fund will push for trimming Illinois Tool’s eight segments to the four or five most profitable ones, said the person, who asked not to be identified because the discussions are private. Any future acquisitions would be focused on the remaining businesses, the person said yesterday.

Illinois Tool disclosed earlier yesterday that Relational had acquired a 2.1 percent stake in the maker of auto parts and welding products. Relational has an option to name David Batchelder, a fund principal and co-founder, as a director after Illinois Tool’s May 4 shareholders meeting, the company said.

The two sides have had “a series of productive discussions,” Illinois Tool Chairman and Chief Executive Officer David Speer said in a statement. He said the Glenview, Illinois-based manufacturer was “pleased to have reached this agreement with Relational.”

Anna Cordasco, a spokeswoman for San Diego-based Relational, declined to comment about what the fund may do at the company. Illinois Tool’s Alison Donnelly declined to comment on any strategy change being urged by Relational.

ITT, L-3

The fund, which oversees $6.5 billion, has pressed for changes at companies such as industrial conglomerate ITT Corp. and defense contractor L-3 Communications Holdings Inc. Whitworth and Batchelder, who both worked for billionaire oilman T. Boone Pickens, founded the fund in 1996 with $200 million from the California Public Employees’ Retirement System.

At Illinois Tool, Relational also wants the company to centralize logistics and the buying of materials, taking advantage of its size to cut costs, the person said. Sales for 2011 probably totaled $17.9 billion, based on results for the first nine months and analysts’ fourth-quarter estimates.

Illinois Tool’s shares have fallen 11 percent in the past year, worse than the 0.4 percent gain for the Standard & Poor’s 500 Index and the 0.5 percent drop in the S&P 500 Industrials Index. The stock slid 0.3 percent to $49.37 yesterday at the close in New York.

If Batchelder takes up the option to join the board, Illinois Tool has agreed to nominate him again at the 2013 annual meeting, the company said in the statement. Relational, which began buying the stock in 2011, agreed to support Illinois Tool’s recommended nominees, according to the statement.

The company could expand its 10-member board, said Donnelly, the spokeswoman.

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