Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

Another industrial company is talking about a breakup. And it didn't need an activist investor's push to get moving.

Dover Corp., a maker of gas-station fuel pumps and refrigeration equipment, announced Tuesday that it's officially exploring a breakup. I say officially because a separation of Dover's energy unit has been rumored for some time, especially as CEO Bob Livingston has grown increasingly receptive to questions about a split. Dover will look to spin off, sell or merge the parts of its energy unit that sell artificial lifts, automation tools and drill-bit inserts (a $1 billion business), while retaining its bearings, compressions and winch operations.

See-Saw
Dover's average growth rate will stay about the same should it separate out its wellsite energy businesses. Those operations meaningfully pushed up sales in good times, but they could also be a major drag.
Source: Dover

It's a smart move that should make Dover's results less volatile and increase its appeal to investors. Case in point, the 41 percent drop in Dover's EBIT between 2014 and 2016 would have been significantly less acute without the energy business.

Robert W. Baird & Co. analyst Mircea Dobre estimates Dover's parts are worth about $98 a share based on 2017 earnings, compared with a closing price on Monday of $87.94. While it's not ideal to hang on to some odds and ends, bearings and compressions are commoditized businesses that take longer to recover from downturns, and it will be easier to find buyers for the energy unit without them, as RBC analyst Deane Dray has noted.

A Dover breakup would continue a wave of anti-conglomerate sentiment as industrial companies look to streamline their earnings, increase flexibility and eliminate valuation drags. Earlier this year, Pentair Plc said it would split its water business from its electrical-equipment unit, while HD Supply Holdings Inc. decided to focus on maintenance services and construction-tool supplies by selling its waterworks division. Both of those breakups were prompted or at least encouraged by an activist investor. Not so for Dover, which has no big-name disruptive shareholders at the top of its roster.

Time for Action
Arguably, some expectation of an energy unit recovery is already baked into Dover's stock price, which had climbed 27 percent in the year leading up to Monday
Source: Bloomberg

Livingston had his qualms about the timing of a split. The energy business is only just recovering after the downward spiral in crude prices. Parting with it soon may deprive Dover shareholders of a decent chunk of the company's expected earnings growth over the next few years. But he seems to have recognized that a) predicting the path of oil prices is a fool's errand and b) a simplified business may ultimately trump the value of an improving, yet volatile division.   

He's done this before. Dover used the two biggest takeovers in its history -- the $1.1 billion purchase of Knowles Electronics Holdings in 2005 and the $855 million acquisition of Sound Solutions in 2011 -- to build a communications-technology business that sold microphones used in Apple Inc. iPhones. Even so, Livingston eventually had the presence of mind to realize the unit, for all its growth, was a distraction and source of consternation for the company's more industrial-minded investors. He spun off the division in 2014.

Simplifying
A number of Dover's businesses saw declines from 2014 to 2016, but the biggest dropoff was in the energy unit
Source: Bloomberg

Other industrial CEOs would be wise to follow Dover's lead. Some of these companies may not have attracted activist investors (yet), but they're sitting on misfit businesses that have drawn outsize investor attention. Johnson Controls International Plc's more volatile battery unit, Eaton Corp.'s non-core vehicle-components operations, Danaher Corp.'s dental division and General Electric Co.'s post-Baker Hughes oil and gas business are still on Gadfly's break-up watch list.

The leaders of those companies all have their reasons for holding off on splits. But Dover's breakup decision is just another reminder that it doesn't pay to dawdle.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net