ITT to break itself up, fueling share rally

ATLANTA Wed Jan 12, 2011 8:00pm EST

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ATLANTA (Reuters) - U.S. manufacturer ITT Corp (ITT.N) plans to split itself into three publicly traded companies to take advantage of growing water management and industrial markets as its defense unit braces for U.S. military spending cuts.

The diversified conglomerate is the latest in a string of companies that have moved to split up their operations, including Fortune Brands and Motorola.

ITT Chairman and Chief Executive Steve Loranger said the break-up had been considered for six months and was made by the management and board with no investor pressure.

But activist investor Relational Investors' Ralph Whitworth told Reuters in an interview that the group has amassed a 3.93 percent stake in ITT and urged a break-up of the industrial conglomerate.

Whitworth said that ITT's announcement will likely have averted a proxy fight with Relational Investors, which had nominated three directors in a November letter and had urged a sale of the defense business.

ITT shares rose as much as 18 percent on Wednesday, reaching their highest point since the fall of 2008.

"We are theoretically at the beginning of a recovery in the commercial and industrial end markets, so the timing is good on that front," said Robinson Humphrey analyst Peter Skibitski.

After the split, ITT Corp will continue as an aerospace, transportation, energy and industrial engineering company. Another company will make water pumps, and the third will supply defense equipment.

Last month, ITT said the businesses that supply water pumps and products for transportation markets would drive earnings in 2011. It said revenue and operating income would rise in those two segments, but fall in defense, the company's largest unit.

Skibitski said uncertainty about ITT's defense business because of expected U.S. budget cuts held back the share performance. With the share rise on Wednesday, ITT's value is about $11 billion.

U.S. Defense Secretary Robert Gates last week said he plans to cut $78 billion from the nation's military budget over the next five years because of the government's growing budget deficit.

Sales in 2009 were about $3.4 billion for the water business and $1.3 billion for the unit that supplies airplane and other transportation markets. The defense unit accounted for more than half of 2009 company sales with revenue of $6.3 billion.

Shareholders will own stock in all three companies.

Chief Financial Officer Denise Ramos will be CEO of the new ITT, which will supply airplane parts and products for energy and other commercial markets.

David Melcher, head of the defense unit, will lead the new defense company. Gretchen McClain, president of the fluid and motion businesses, will be CEO of the water business, and current ITT CEO Steve Loranger will serve as its executive chairman.

BREAKING UP IS EASY TO DO

The White Plains, New York-based company was created as International Telephone & Telegraph in 1920 and is in its current form after a three-way split in 1995.

At one time, it owned a variety of companies, from Sheraton Hotels to Continental Baking -- the maker of Wonder Bread. From 1960 to 1977, it made 350 acquisitions.

ITT made headlines in U.S. political circles decades ago over allegations that the Justice Department settled an antitrust suit against the company in return for a $400,000 donation to help fund the Republican National Convention in San Diego in 1972. The GOP moved that event to Miami.

ITT's move follows other corporate spin-offs. Spirits company Fortune Brands FO.N said last month it would spin off or sell its golf unit and spin off its home products division. Motorola Inc split into two technology companies that began formal trading this year (MMI.N) (MSI.N).

General Electric Co (GE.N) this month expects to close its sale of a majority stake in NBC Universal media to Comcast Corp (CMCSA.O), marking its exit from a business that investors long said fit poorly among its industrial franchises.

In an interview, Whitworth said Relational would take the spinoff into consideration and decide whether to withdraw the nominations.

Relational had earlier asked the company to spin off the basic industrials segment and sell the defense business to a private equity firm, he said.

ITT took a slightly different step by announcing that it will spin off its defense and water technology businesses to shareholders in tax-free transactions.

Pro forma 2011 revenue for the future ITT Corp is estimated at $2.1 billion, the company said.

ITT expects to complete the breakup by the end of the year. Lazard and JPMorgan Chase advised the company on its plan.

ITT shares, which had gained 10 percent in the past three months, closed up 16.5 percent, or $8.72, to $61.50 on the New York Stock Exchange on Wednesday.

(Reporting by Karen Jacobs in Atlanta, Soyoung Kim, Nadia Damouni and Nick Zieminski in New York, Scott Malone in Boston and Bijoy Koyitty in Bangalore. Editing by Robert MacMillan,Bernard Orr and Carol Bishopric)

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