Hedge fund Millbrook seeks to split up Unisys

By Tiffany Wu and Jim Finkle

NEW YORK/BOSTON (Reuters) - Unisys Corp's (UIS.N) third-largest shareholder is calling for the technology services company to sell or spin off its U.S. government business, saying that could as much as triple its stock price.

U.S. hedge fund Millbrook Capital Management Inc, which owns about 9.9 percent of the company's outstanding stock, said in a Tuesday filing with the U.S. Securities and Exchange Commission that it asked the Unisys board to hire an independent investment bank to review strategic alternatives.

Shares of Unisys, which is in the midst of a multiyear effort to reinvent itself by slashing costs and entering new businesses, rose 3 percent to $4.00 in early trading.

The review should focus on realizing the potential of the company's undervalued U.S. government business through a sale, tax-free spin-off or initial public offering, Millbrook said in its letter to the board, which was dated Monday.

"The best alternative would be an initial public offering of 19 percent of the shares of a subsidiary of Unisys comprising all of its U.S. government services business," said the letter from Clay Lifflander, president of Millbrook and its MMI Investments LP, which owns 34.8 million Unisys shares.

Millbrook said a spin-off would unlock the value of the government business, which is being dragged by Unisys' weak hardware business.

The separation of the government business with roughly $1.5 billion in annual revenue could result in a stock price of about $8 to $12, assuming the business trades in-line with its peers, the New York-based hedge fund said.

Chad Hersh, an analyst with the consulting group Celent, said the government business is the most profitable and dependable in the Unisys' portfolio, which includes commercial technology services and computer hardware.

"The activist shareholder is probably in the right. The government business can only carry the rest of Unisys for so long," Hersh said.

RESTRUCTURING

Unisys is evaluating the Millbrook letter, the company said in a statement.

Unisys Chief Executive Joseph McGrath has been working to reinvent the company since he took the helm in January 2005, transforming it from a computer maker known for building one of the world's first mainframe computers into a services company that designs and installs systems using hardware from other manufacturers.

McGrath has divested unprofitable units, outsourced production of hardware, focused its services business on fastest-growing areas and slashed headcount to cut costs.

Millbrook credited the restructuring for boosting earnings before interest, tax, depreciation and amortization (EBITDA) from about $212 million, including retirement plan expenses, in 2005 to an estimated $523 million in 2007.

But the hedge fund said "a cavalcade of small failures" by management has obscured that improvement. "In short, you've thrown an earnings party and no one has attended," said Lifflander in the letter.