Whitworth's Relational says urged ITT breakup

NEW YORK (Reuters) - Activist investor Relational Investors has amassed a 3.93 percent stake in ITT Corp ITT.N and urged a breakup of the industrial conglomerate, Relational co-founder Ralph Whitworth said on Wednesday.

Whitworth spoke to Reuters in an interview after ITT announced plans to split itself to three separate companies to take advantage of growing water and industrial markets as its defense unit braces for U.S. military spending cuts.

ITT Chairman and Chief Executive Steve Loranger said earlier on Wednesday that the breakup had been considered for six months and was made by the management and board with no investor pressure.

In a November 24 letter, Relational nominated three directors to the company’s board -- co-founder David Batchelder, Relational principal Jay Winship and himself --, Whitworth said.

The steps taken by ITT will likely have averted a proxy contest with Relational Investors, Whitworth said, adding that he will take the announcement into consideration and decide whether to withdraw the nominations.

Relational urged the company to sell its defense unit to a private equity firm, and spin off its basic industrials business, Whitworth 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.

ITT will continue to trade as a general industrial company that serves in the aerospace, transportation and energy markets. Loranger will become executive chairman of the board at the water technology company.

ITT took a view that the uncertainty surrounding U.S. defense spending cuts have weighed on the shares of the company, which has fast-growing segments like water and industrials, one person familiar with its strategy said.

“There was an undervaluation relative to some of the parts. Commercial is ramping up very significantly as we come out of the recession. Defense is kind of flat to slightly down as you go through budget cuts,” the person said.

“So there was a view taken that the best thing for shareholders was to create three pure play companies that trade publicly so investors can value and understand these as three companies,” he said.

Reporting by Nadia Damouni and Soyoung Kim; Editing by Tim Dobbyn