Whitworth’s Relational Buys SPX Stake in Industrial Focus

Ralph Whitworth’s Relational Investors LLC disclosed a stake in SPX Corp., expanding its industrial holdings, and urged the pump maker to sell assets and hone its acquisition strategy.

SPX’s failed bid for Gardner Denver Inc. showed that the Charlotte, North Carolina-based manufacturer was straying from its own objective of focusing on so-called flow control, Relational co-founder and principal David Batchelder said today.

“They are going to have to regain shareholder trust,” Batchelder said in a telephone interview after Relational disclosed a 8.76 percent stake that made the fund the second-largest stockholder after BlackRock Inc. “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.”

Taking an SPX stake builds on industrial investments by Relational since January 2012 that include shares of bearings maker Timken Co. and Illinois Tool Works Inc. Relational has pressed Timken to spin off its steel unit and prodded Illinois Tool to divest assets and consolidate business units.

“Despite the company’s attractive business mix, total shareholder returns and profitability have lagged peers’ due primarily to excessive prices paid for acquisitions,” Relational said in the filing about SPX, which also makes transformers and thermal equipment for power generation.

Unlocking Value

SPX would be worth at least $100 a share by breaking up the company and unlocking value at the pump and valve business, known as Flow Technology, said Brian Langenberg, principal and director of research at Chicago-based Langenberg & Co. SPX’s profit margins have trailed peers, he said. Operating margins in 2012 were 6.3 percent compared with 16 percent for Illinois Tool, according to data compiled by Bloomberg.

“With SPX, you’ve got about a $5 billion revenue stream that generates single-digit margins,” Langenberg, who has a hold rating on the shares, said in a telephone interview. “In this environment, that’s going to attract some attention.”

SPX, whose flow business includes customers such as Coca-Cola Co. and Exxon Mobil Corp., fell 0.9 percent to $79.46 at the close in New York. The stock has advanced 13 percent this year compared with a 4.3 percent gain for the Standard & Poor’s 500 Index.

Jennifer Epstein, a spokeswoman for SPX, declined to comment.

ClydeUnion Deal

Langenberg cited the 2011 acquisition of ClydeUnion Pumps for 700 million pounds ($1.1 billion) as one example of a faulty purchase, saying SPX overpaid by at least $300 million.

In December SPX ended talks to buy rival Gardner Denver after shareholders balked at the deal. Investors didn’t support the price, Batchelder said.

“They went off and looked at a really big deal -- Gardner Denver. They were rumored to be the high bidder around $85 a share and the deal is going off rumored now around $75,” Batchelder said. “That’s not the kind of activity shareholders expected them to do.”

Relational said in today’s filing that SPX should abandon its “growth-at-any-cost strategy,” boost profit margins to the level of peers and link executive pay more to value creation.

If it fails to achieve this, “the company should explore strategic alternatives for better achieving the long-term intrinsic value of the assets,” Relational said in the filing.

SPX should shed its thermal business, Langenberg said. That unit had revenue of $1.5 billion last year, according to a presentation this month. The market for SPX’s transformer business is improving and should help profit as revenue rebounds, he said, adding that the flow business has the most potential.

“Flow is a pretty high multiple business,” Langenberg said. “The other stuff can hide that value.”