SPX Turns Prey as Relational Pushes Asset Sales: Real M&A
SPX Corp. (SPW), which ended talks to buy equipment maker Gardner Denver Inc. (GDI) last year, is poised to become a target itself after activist Relational Investors LLC urged it to shed assets and focus on industrial pumps.
Relational this week disclosed an 8.76 percent stake in SPX and pressed the $3.8 billion company to increase profitability and shareholder value by accelerating sales of units not tied to its core flow-control business. SPX’s stock traded yesterday at a lower multiple to revenue and net assets than any of its North American peers, according to data compiled by Bloomberg.
Concentrating on pumps for flow control would make Charlotte, North Carolina-based SPX a more likely takeover target, said Standard & Poor’s. A slimmed-down company could lure buyers from Flowserve Corp. (FLS) to GEA Group AG (G1A) as well as private-equity suitors, according to FBR & Co. Buyout firms, which showed interest in Gardner Denver, could even be tempted to bid for SPX in its current form, SunTrust Banks Inc. said.
“There’s a lot of belief that there’s value here,” Nick Heymann, a New York-based analyst at William Blair & Co., said in a telephone interview. Divesting units would make a takeover “a much better possibility.”
Jennifer Epstein, a spokeswoman for SPX, declined to comment on whether the company would be willing to divest units or consider a sale.
SPX produces equipment such as mixers, evaporators and hydraulic tools for a variety of industries. It got more than half of its $5.1 billion in revenue in 2012 and a majority of its operating profit from its flow-control unit, which makes pumps and valves, according to data compiled by Bloomberg.
Activist Ralph Whitworth disclosed in a Feb. 25 filing that his firm Relational had taken a stake in SPX, saying the stock was “significantly undervalued.” Overpaying for acquisitions hurt shareholder returns and profitability, and SPX should unlock value by improving margins and accelerating sales of non- core, underperforming assets, Relational said.
SPX ended takeover talks with Gardner Denver in December because its shareholders didn’t support the deal for the maker of compressors and industrial equipment, two people familiar with the matter said at the time. Gardner Denver said it was reviewing its options in October after investor ValueAct Holdings LP urged a sale.
SPX is “going to have to regain shareholder trust,” David Batchelder, co-founder and principal at Relational, now SPX’s second-biggest shareholder, said in a phone interview on the day of the firm’s filing. “To do that, they’re going to need to get back to their previously stated goal of becoming a pure-play flow business over time.”
The company’s stock, which closed yesterday at $79.91, traded at 0.78 times its sales during the past 12 months. That trailed the median multiple of 1.37 among North American flow- control equipment companies valued at more than $1 billion, according to data compiled by Bloomberg. The shares traded at 1.79 times book value, compared with the median 2.97 multiple for the group, the data show.
Today, SPX shares rose 1.3 percent to $80.93, their highest closing level since July 2011.
A simplified business focused on flow control is likely to lure more interest from potential acquirers, according to Kevin Kirkeby, a New York-based equity analyst at S&P.
“Somebody taking it on now probably would have 10 additional items on their to-do list in terms of really pulling out the value of the businesses,” he said. “Those are steps and activities that maybe are beyond the scope of some potential buyers.”
In particular, SPX’s thermal equipment and services unit, which has seen profits curtailed as demand for cooling systems and heat exchangers slowed, would deter some buyers, said Heymann of William Blair. The division accounted for 29 percent of SPX’s revenue in 2012.
“We had kind of thought that eventually at some point or another this was going to become a flow business and that the flow business would then get sold,” Heymann said. The thermal business “is the burr in the saddle that’s got to get fixed.”
Ajay Kejriwal of FBR said divesting at least parts of the industrial products unit as well would position the remaining flow control-focused business as an attractive target for suitors including Flowserve, machinery maker GEA and Lund, Sweden-based Alfa Laval AB. (ALFA)
“These are good assets,” Kejriwal said in a phone interview from New York. “The flow business could be sold as a standalone company.”
Donat von Mueller, a spokesman for Dusseldorf, Germany- based GEA, Steve Boone, a spokesman for Irving, Texas-based Flowserve, and Chip Bresette of Alfa Laval declined to comment on whether their companies would be interested in acquiring SPX if it shed assets.
A slimmer SPX would also be attractive to private-equity suitors, said Kejriwal and Heymann.
At least eight private-equity firms including Bain Capital LLC, TPG Capital and Onex Corp. expressed interest in acquiring Gardner Denver, according to people familiar with the matter. The Wayne, Pennsylvania-based company last week received a $3.68 billion bid from KKR & Co., a person familiar with the matter, who asked not to be named as the process is private, said.
Still, SPX has already outlined its intent to become a pure-play flow control company and could build out that business on its own, according to Shannon O’Callaghan, a New York-based analyst at Nomura Holdings Inc.
“It’s not like you have a management team that’s executing a wildly different playbook already. They’re already choosing to sell assets for good value when they can,” O’Callaghan said. “Now would somebody else want to lever it up even more or sell things even faster? Potentially.”
Private-equity firms, lured by SPX’s consistent revenue stream, free cash flow generation and the opportunity for margin expansion, could seek to buy the company even before it makes any divestitures, according to James Kawai, an Atlanta-based analyst at SunTrust.
SPX’s operating margin of 6.3 percent during the past 12 months was the lowest among North American peers in the flow- control equipment industry, according to data compiled by Bloomberg.
“There’s a sense that here you have a business with lots of revenue visibility and lots of potential upside on the margins from operating improvements,” Kawai said in a phone interview. “There are not a lot of industrial companies that are what we call under-earning. Most are at peak earnings or at very high margins and they’re doing very well. So this one is kind of unique.”