Relational Investors Confirms 8.52% Stake in Manitowoc Co. (MTW); Urges Split
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As rumored earlier, in a 13D filing on Manitowoc Co. (NYSE: MTW), hedge fund Relational Investors disclosed a 8.52%, or 11,512,169 share, stake in the company. The firm did not hold shares at the end of the latest quarter ending March 31, 2014. The firm is urging the company to split
ITEM 4. PURPOSE OF THE TRANSACTION.
The Manitowoc Company, Inc. (the “Company”) consists of two core, yet incongruent businesses - the food business segment (the “Food business”) and the remaining business segment (the “Crane business”). These two businesses differ materially in their operating metrics and cyclical characteristics, which we’re convinced causes a perpetual discount in the share price.
The Reporting Persons have direct and recent experience engaging companies suffering similar discounts at the Timken Company (“Timken”), B/E Aerospace, Inc., ITT Corporation, Ingersoll-Rand Public Limited Company and Agilent Technologies, Inc. where separation of incongruent businesses led to significant value creation. This experience gives us confidence in our analysis of the potential value creation available to the Company as further described below.
The Reporting Persons have had success in prior engagements eliciting a positive response in the market and, following discussions with management, a pro-active response from the companies. For example, following Timken’s announced separation of its steel and bearings businesses, then-CEO Jim Griffith reflected, “[w]e have two industry-leading businesses that deserve to be recognized for their success in the marketplace. So we’re embarking on plans to separate them into two strong independent companies. We expect that the separation will enable other benefits, allowing the new companies to place greater focus on growth in their core markets, optimize their individual capital structures and capital allocation policies, improve their strategic flexibility to invest in the business and pursue acquisitions, as well as attract a more focused shareholder base.”
The Reporting Persons acquired the Shares covered by this Statement because, in their opinion, such Shares are undervalued, and the current share price does not adequately reflect the full potential for significant earnings and cash flow growth of the Company.
Spin-off the Food Business to Create Two Pure Play Companies
The Reporting Persons believe that the market significantly undervalues the Company due to its combination of the two businesses and that a spin-off of the Food business from the Crane business would maximize shareholder value. In January 2014, the Reporting Persons met with Company management to recommend that the Company hire advisors to effectuate a spin-off of its Food business into a separately traded public company. To date, the board of directors of the Company has declined our request for a meeting.
Based on the Reporting Persons’ communications with management and other publicly available information, the Company appears to maintain the combination of the less cyclical Food business in order to mute the inherent cyclicality of the Crane business. The Reporting Persons believe that this business combination causes the Company to trade at a perpetual discount, as reflected in the Company’s stock price performance and its EV/EBITDA multiple which is more closely in line with its public crane comparable than its public food equipment comparable (which trades at a significant premium to the Crane business). The Reporting Persons believe investors undervalue the Food business despite the fact that this segment manufactures premium equipment with market-leading technologies and possesses significant expansion opportunities. The Reporting Persons believe that with the existing structure the Company will continue to trade at a discount due to the widely divergent business characteristics of the Food and Crane businesses and the lack of meaningful synergies.
Operational Improvements and Strategic Sourcing
The Reporting Persons believe that improvements in profit margins and asset utilization will be increasingly important to improving equity value. The Reporting Persons are confident management is focused on cost rationalization to close the Company’s margin gap to its food peers, strategic sourcing initiatives for both businesses, asset utilization improvement, increased aftermarket penetration, and the successful implementation of the recently announced $80m cost savings initiative.
Capital Allocation Discipline
The Reporting Persons believe the Company will achieve its leverage targets by the end of 2014. Therefore, a larger portion of excess cash flows in future periods will be available for distribution to shareholders through dividends and share repurchases. The Reporting Persons believe that the Company’s expected annual future free cash flows make capital allocation an increasingly important component of equity value creation. The Reporting Persons have been communicating with the Company to help ensure that the Company has in place capital allocation processes and disciplines to ensure that future free cash flows are allocated to the highest and best return opportunities. Based on the Company’s current valuation, the Reporting Persons believe share repurchases represent a low-risk, high-return hurdle against which all alternative uses of capital, particularly acquisitions, must be benchmarked.
Structure Future Debt Financings to Mitigate Cost of a Spin-Off of the Food Business
The Reporting Persons believe it is imperative that the Company structure all future debt financings to mitigate the cost of a spin-off of the Food business.
The Reporting Persons intend to be persistent and tenacious in their efforts to persuade the Company to increase shareholder value via two distinct sources: the realignment of assets by separating the Food and the Crane businesses and improving operating margins and consequently earnings per share in both businesses.
The Reporting Persons are convinced by their analysis that time is of the essence for the Company and the sooner the issues are addressed the more value can be created for shareholders. Therefore the Reporting Persons reserve the right to, and may in the future exercise any and all of their respective rights as shareholders of the Company in a manner consistent with their equity interests, including seeking representation on the Company’s board of directors at a special or annual meeting of the Company’s shareholders including nominating directors at the 2015 annual meeting.
The Reporting Persons and their representatives and advisers intend to continue their discussions regarding the Company’s business mix and strategic direction with members of the board of directors and management of the Company. In addition, the Reporting Persons and their representatives and advisers may communicate with other shareholders, industry participants and other interested parties concerning the Company.
The Reporting Persons may from time-to-time (i) acquire additional Shares (subject to availability at prices deemed favorable) in the open market, in privately negotiated transactions or otherwise, or (ii) dispose of Shares at prices deemed favorable in the open market, in privately negotiated transactions or otherwise.
As of the date of this Statement, except as set forth above, none of the Reporting Persons has any present plan or intention which would result in or relate to any of the actions described in subparagraphs (a) through (j) of Item 4 of Schedule 13D.
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Related EntitiesRelational Investors LLC, Dividend, Hedge Funds, 13D, Earnings, Definitive Agreement
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