Textron Value in Breakup Seen Tempting Activist Investor
Activist hedge-fund managers in search of their next prey may look to Textron Inc. (TXT)
The $7.9 billion maker of Cessna planes and Bell helicopters has a valuation that lags behind 83 percent of industrial stocks in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. Credit Suisse Group AG said Providence, Rhode Island-based Textron may become susceptible to pressure from activists wanting to break up the conglomerate.
While Textron’s earnings are forecast by analysts to surge next year to the highest level since the financial crisis, the stock is being hampered by lackluster growth at its defense unit, which could be spun off, according to industry consultant Silverline Group. The units that make golf carts and auto parts are overshadowed in the current structure and would be appealing targets, said Royal Bank of Canada, which pegs Textron’s break-up value at $42 a share, 49 percent more than yesterday’s price.
“Textron screens very attractively for an activist,” Julian Mitchell, a New York-based analyst at Credit Suisse, said in a phone interview. “You’ve got high-quality brands hiding in a conglomerate that don’t have obvious synergies.”
It’s already been a busy year for activists. Carl Icahn is trying to scuttle the Dell Inc. management buyout, while Bill Ackman said last week he had amassed a stake in Air Products & Chemicals Inc., an industrial-gas producer. Nelson Peltz is said to have purchased a large position in DuPont Co., and is also pressuring PepsiCo Inc. to combine with snack maker Mondelez International Inc.
“Activist investing is all the rage at the moment, as fund managers look to unlock value that they see as trapped in public corporations,” Robert Stallard, a New York-based analyst at RBC, wrote in a July 22 report. He sees Textron as a “viable candidate” and said that, if broken up, the company’s total value may be $42 a share, a price it hasn’t reached since 2008.
Today, Textron shares rose 0.9 percent to $28.41 at 9:57 a.m. New York time.
David Sylvestre, a spokesman at Textron, declined to comment on whether the company would consider a breakup or has been approached by potential activist shareholders.
Stallard estimates about $8 a share of value would be created by disposing of Textron’s four industrial businesses -- Kautex auto parts, Jacobsen golf-course mowers, E-Z-GO golf carts, and Greenlee electrical tools. Each would make sense for a range of potential buyers, including Greenlee for ABB Ltd. (ABBN) and Jacobsen for Stanley Black & Decker Inc. (SWK), he said.
There’s no need for Bell and Cessna to be within one company because there are few synergies between helicopters and the lineup of business jets and propeller planes, Stallard and Credit Suisse’s Mitchell said. Bell is Textron’s largest revenue contributor, generating $4.3 billion of last year’s $12 billion of sales. Cessna is second with $3.1 billion.
Cessna has struggled to recover from a collapse in private jet sales during the global economic slump and posted a $50 million operating loss in the second quarter as revenue slid 27 percent from a year earlier. While it may not be the best time to sell the business, its woes are weighing down Textron’s valuation, according to David Berkowitz, president of Radar Asset Management LLC in Summit, New Jersey.
“There probably has to be some further rationalization at Cessna,” Berkowitz said in a phone interview. “Either that or potentially selling it or spinning it off.”
Textron Systems, the unit that makes the small, unmanned military aircraft called drones as well as armored vehicles, could be spun off as a standalone entity, according to Michael Lewis, managing director of Silverline Group, a consulting firm in McLean, Virginia.
That business isn’t getting the value it deserves, and at the same time may be holding back Textron’s stock because of its exposure to government funds, he said. About 29 percent of Textron’s total revenue in 2012 stemmed from U.S. government contracts, according to the company’s annual earnings filing.
“Investors who own Textron may view it as being bogged down by the perception that they have a large proportion of the portfolio tied to defense markets,” Lewis said in a phone interview. “It would make sense to carve out Textron Systems. That’s a very valuable asset.”
Because Textron has disparate businesses and strong brands, and hasn’t allocated much of its cash lately toward dividends and buybacks, it may be vulnerable to activist involvement, according to Credit Suisse’s Mitchell.
Textron pays shareholders a 2-cent quarterly dividend, down from 23 cents in January 2009, according to data compiled by Bloomberg. Its dividend yield trails 55 of the 60 other industrial stocks in the S&P 500 Index, the data show.
The stock was valued yesterday at 12 times analysts’ average earnings-per-share forecast for 2014. S&P 500 industrial companies fetch an average price-earnings ratio of about 15 based on next year’s profit estimates, data compiled by Bloomberg show.
The company hasn’t made any major acquisitions or divestments in the four years since the U.S. recession ended, the data show. Splitting up would be a way to bridge the disparity between its sum-of-the-parts value and current stock price, Mitchell said.
Textron “has kept the portfolio pretty much unchanged since the last downturn,” he said. “You unlock the value by breaking up the non-core businesses, making the core-brand businesses a bigger piece of the pie and giving shareholders some of the excess cash that the divestments generate.”
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