Manitowoc Asset Sale Could Prove Better Than Spinoff: Real M&A

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Manitowoc Co. may need to reconsider the way it’s breaking itself up.

The $2.5 billion company announced plans in January to spin off its commercial kitchen-equipment unit, capitulating to calls from Carl Icahn and Relational Investors for a separation of the freezer and deep-fryer business from its crane unit, more cyclical because it’s tied to construction.

The rationale for the split was to give the food-service business a higher valuation. The drop in oil prices and slow growth for U.S. restaurants could make that harder to achieve.

While Manitowoc initially rose on the prospect of a breakup, its shares have declined almost 40 percent since Relational disclosed its position last June as analysts cut their earnings forecasts. Lower profits will make it more difficult for Manitowoc to reduce its debt burden and may force the company to saddle its food-equipment spinoff with above-average leverage, said Bloomberg Intelligence’s Joel Levington.

“What you’d be pushing out as the golden goose wouldn’t be that golden,” Levington said in a phone interview. “It’s going to at least impair their ability to grow externally relative to peers, and it may burden them down if the focus moves toward cutting capital expenditures to try to generate enough cash to pay down debt.”

Deep Fryers

A possible alternative is to sell, rather than spin off, the food-service division. Buyers may be willing to give one of the market leaders in commercial ice-machines, deep fryers and walk-in refrigerators a higher valuation than the public market. Plus, Manitowoc could use the proceeds to help lighten the debt load at the remaining crane unit, making it a stronger stand-alone business, Levington said.

A representative for Manitowoc didn’t respond to a request for comment.

In theory, Manitowoc could sell the crane operations instead and lower the debt burden for the food-equipment business. The crane division could interest the likes of Chinese industrial company Sany Heavy Industry Co., said Mircea Dobre of Robert W. Baird & Co.

But the food-service division is the easier business to sell because its cash flows are more consistent, said Larry De Maria of William Blair & Co. Possible buyers could include Dover Corp. or Illinois Tool Works Inc., analysts have said.

Sales Tax

The biggest hurdle to selling versus spinning is the tax implications. A spinoff of food equipment would be tax-free, while there would likely be some liabilities attached to a divestiture. Because of that, Dobre and De Maria both think a sale of either of the two businesses is more likely post-spinoff. In that scenario, buyers may have to wait a while before making a move.

“I wouldn’t be surprised if both these businesses end up attracting bidders post-split,” said Dobre, a Milwaukee-based analyst. “I don’t know that you necessarily have the pieces in place to go with an outright sale as opposed to a split first.”

How big of a tax bill Manitowoc would face from a unit sale isn’t clear though. The food-service division is in large part composed of products obtained through the 2008 acquisition of Enodis Plc for $2.7 billion. That was an expensive deal and the business has had a mixed performance, which could make the taxes tied to a sale lower, said Levington of Bloomberg Intelligence.

It may be worth at least considering whether a sale of the food-equipment assets is a better path to unlocking value. Activist investors could encourage this.

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