DEALTALK-Failed Gardner Denver bid puts SPX in activist land

Thu Feb 28, 2013 12:22pm EST

* Activist investor Relational acquires 8.8 pct stake in SPX

* SPX's Gardner Denver bid in Dec was trigger for activism

* Relational thinks SPX should divest thermal, industrial units

* Relational also to address executive compensation at SPX

By Soyoung Kim

NEW YORK, Feb 28 (Reuters) - SPX Corp's takeover bid for rival Gardner Denver Inc, which would have been an industry game-changer if successful, ended up putting the diversified manufacturer in a spot that many companies wish strenuously to avoid: Having a big-name activist as its largest shareholder.

Ralph Whitworth's Relational Investors LLC disclosed an 8.8 percent stake in the industrial machinery maker on Monday, saying the company's shares and profit suffered from its "growth-at-any-cost strategy" and "excessive prices" paid for acquisitions.

Relational set its sights on SPX in December as people familiar with the matter told Reuters that the industrial machinery maker was in advanced talks to buy Gardner Denver for more than $4 billion, or $85 per share - news that sent SPX's shares plunging that month.

Relational, which was not a shareholder at that time, felt the bid - which would dwarf SPX's market value at the time of less than $3 billion - was too big a bite and would endanger the company's stated goal of paring down to focus on flow technology.

That unit makes equipment used to produce liquids ranging from petroleum to dairy products and had 2012 sales of $2.7 billion, just over half of SPX's total revenue.

Only after the talks broke down in late December in the face of backlash from SPX shareholders, which was reported by Reuters on Dec. 21, did Relational start buying shares. SPX's market value, which tumbled as low as $2.8 billion during the deal talks in December, has since recovered to $3.8 billion.

Now, the San Diego-based investment firm intends to make sure that management sticks to its commitment to become a flow technology-focused company, divesting noncore assets and not paying top dollar for deals, said the people familiar with the investor. They asked not to be named because they were not authorized to speak with the media.

Representatives for Relational declined to comment. But the investor disclosed in regulatory filings on Monday that the significant drop in SPX shares in December "reflected the market's lack of confidence in the board and management's ability to properly discipline capital and asset acquisition opportunities."

SPX declined to comment for the story. SPX shares were down 0.3 percent at $80.66 on Thursday afternoon.

ASSET SALES, PAY

SPX Chief Executive Chris Kearney has been adding and selling businesses to focus more narrowly on flow technology over the past few years, and last year sold its automotive service solutions business to Robert Bosch GmbH for net proceeds of about $1 billion.

Charlotte, North Carolina-based SPX still has two other major segments that make up nearly half of revenue: a thermal business that makes cooling towers and heat exchangers for power plants as well as boilers, and an industrial unit that makes power transformers, industrial tools and precision machine components.

Relational believes that SPX should sell its thermal business, which had roughly $1.5 billion in revenue last year and has grappled with declining demand as well as increased competition from China, the people familiar with the investment firm said.

SPX can also boost its share price significantly by divesting the bulk of its industrial business, except for the power transformers, the people said.

Power transformers, used by utility companies, represented a third of the industrial segment's $927 million revenue in 2012 and Relational sees value in keeping this part of the industrial business as sales are likely to rebound, the people said.

A flow control-focused SPX will open up the company for consolidation opportunities in an industry that has seen a wave of deals over the past years, but Relational's focus is on divestitures rather than a sale of the company, the people said.

In July, United Technologies Corp sold its Hamilton Sundstrand flow control businesses to Carlyle Group LP and BC Partners for $3.46 billion, following an auction that also attracted interest from SPX and Dover Corp. Earlier last year, Pentair Ltd merged with Tyco International's flow control business to create an industry powerhouse.

"If the company is operating in a proper manner and with a proper compensation scheme, that will give SPX a valuation in the marketplace that is equal to or in excess of what they could be sold for," said one of the people familiar with the investment firm.

Relational, which expects to meet with management in the near term, also will argue that the company should align its executive compensation structure more closely with shareholder returns. Institutional Shareholder Services and Glass Lewis, leading proxy advisers, both criticized SPX's proposed management compensation last year.

The proposal, which called for higher executive compensation for 2011 even as the stock prices declined over the period, narrowly passed shareholder votes.

Relational has scored major wins with its activist campaigns at several industrial conglomerates in recent years.

Whitworth pressured industrial conglomerate ITT Corp to split up its defense and water purifying businesses. The investor, which owns a 2.73 percent stake in Illinois Tool Works Inc according to Reuters data, was also instrumental in convincing the industrial conglomerate to pare down operations.

In one of the latest campaigns, Relational is also urging Timken Co to break up its steel and bearings businesses, a proposal that the investor has said has strong shareholder support.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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