Ingersoll-Rand Plc plans to spin off its commercial and residential security businesses within the next year after hedge-fund manager Nelson Peltz pressed for a breakup to boost shareholder value.
Ingersoll’s strategy, which also includes a stock buyback and a 31 percent dividend boost, marks the culmination of talks with Peltz’s Trian Fund Management LP, which disclosed a 7.3 percent stake in May. Peltz had threatened a proxy battle, a person familiar with the matter said.
The new security company will have about $2 billion in yearly sales, while the existing Ingersoll will generate about $12 billion and retain climate-control operations with brands such as Trane and American Standard. The spinoff will let investors value the different businesses separately, said Chief Executive Officer Michael W. Lamach, who will stay at Ingersoll.
“In separating out the security business, which really has very few synergies with the rest of the business, that’s a great step and likely to allow that business on its own to seek some potential buyers,” Steven Winoker, a New York-based analyst at Sanford C. Bernstein & Co., said in a telephone interview. “It’s an industry that continues to consolidate.”
Some heating and air-conditioning companies have an enterprise value of about 9 times earnings, and strong security firms have a multiple of about 11 on the same basis, Julian Mitchell, a New York-based analyst with Credit Suisse AG, said in a note to clients. With Ingersoll’s current multiple of 8, a split may mean the separate businesses “yield a closing of this valuation discrepancy over time,” he said.
Both Mitchell and Winoker have outperform ratings on the shares.
Ingersoll fell 1.9 percent to $47.79 at the close in New York, erasing earlier gains. The shares had previously risen 60 percent this year.
Completion of the spinoff will require more work on structure and management, and those plans will be subject to board approval, the Swords, Ireland-based company said.
Peltz suggested in a regulatory filing in August, the same month he joined the board, that the maker of air-conditioning systems, climate-control technologies and security systems be split into three companies.
Separating the security businesses, with brands including Schlage and Kryptonite, will be tax-free for shareholders, the company said.
Ingersoll said today it will also repurchase as much as $2 billion of existing shares starting in 2013 and complete the buyback in the first three months of 2014. The company raised its quarterly dividend to 21 cents a share, payable March 28 to investors holding stock as of March 12.
Ingersoll moved its headquarters to Bermuda from New Jersey in 2001 and then to Ireland in 2009, in part because of tax laws.