Reuters Summit-Spin-offs to boost industrial dealmaking

(For other news from the Reuters Global Mergers and
Acquisitions Summit, click
http://www.reuters.com/summit/MergersandAcquisitions11?pid=500)

* A wave of split-ups, spin-offs creates more M&A targets

* More pearl string-type deals in $3 bln range seen

* Larger deals to increase as economic recovery takes hold

* Buyout interest in units spun off from conglomerates

By Soyoung Kim and Megan Davies

NEW YORK, April 5 (Reuters) – A wave of split-ups and
divestitures would boost dealmaking in the diversified
industrials sector by creating potential takeover targets for
larger rivals and private equity firms flush with cash.

More diversified companies are aggressively reviewing their
portfolios to boost growth in a slow economic rebound, spurring
spin-offs and sales of non-core assets and opening the door for
these newly created independent companies to be acquired,
senior dealmakers said on Tuesday at the Reuters Global Mergers
and Acquisitions Summit in New York.

“M&A path is a solution of a lot of these companies … As
an M&A person, I get excited to see targets created,” said Will
Dotson, head of North American industrials group at Morgan
Stanley. (MS.N: Quote, Profile, Research)

Diversified U.S. conglomerate ITT Corp (ITT.N: Quote, Profile, Research) announced
plans earlier this year to split into three companies
separately focused on water technology, defense and industrial
businesses, while Italian industrial group Fiat SpA (FIA.MI: Quote, Profile, Research)
separated its truck and tractor business from carmaking
activities.

Several other conglomerates across a broad range of sectors
have also gone down the spin-off path, such as Motorola,
Marathon Oil Corp (MRO.N: Quote, Profile, Research) and Sara Lee Corp. (SLE.N: Quote, Profile, Research)

“This is part of a broader story. CEOs are really
aggressively managing their portfolios and trying to reposition
their companies for broader growth. Selling or spinning off
businesses is just part of that,” said Larry Hamdan, executive
chairman of global M&A at Barclays Capital. (BARC.L: Quote, Profile, Research)

Most industrial deals were within the $1 billion to $3
billion range over the past year but improving earnings, low
interest rates and record cash levels have emboldened chief
executives to strike larger deals in recent months.

Danaher Corp (DHR.N: Quote, Profile, Research) bought Beckman Coulter (BEC.N: Quote, Profile, Research) for
$5.8 billion in cash and Caterpillar Inc (CAT.N: Quote, Profile, Research) struck a $7.6
billion deal to take over mining equipment maker Bucyrus.
(BUCY.O: Quote, Profile, Research) General Electric Co (GE.N: Quote, Profile, Research) has spent some $11 billion
on several energy deals over the past year.

Dealmakers said the industry would continue to see more
deals in the $3 billion range but an increasing number of
larger deals are expected in coming years as an economic
recovery takes hold.

“A ‘string of pearls’-type strategy is appropriate for this
point in the cycle,” said Andy Lipsky, head of M&A for the
Americas at Credit Suisse (CSGN.VX: Quote, Profile, Research), referring to bolt-on
acquisitions as opposed to one massive deal.

“The bigger deals happen at the end of the cycle.”

BUYOUT INTEREST

Private equity firms have been active in bidding for
industrial assets but have been outbid in several recent
auctions by strategic bidders, which have the upper hand in
nearly any auction as they can generate cost savings from
combining businesses.

Still, with the high yield market giving private equity
firms the ability to put leverage of 5-6 times EBITDA on a
target, they have the ability to bid competitively, offering
8-9 times EBITDA, sometimes even more, for the right targets,
said Barclays’ Hamdan.

“Sponsors can certainly be very competitive with strategic
buyers,” he said. “They are active in virtually every auction
that we are running right now. But when you have a strategic
buyer with synergies, who really does really want to buy a
particular target, most of the time they’re successful.”

“But the fact is that sponsors are very competitive in this
market, and I think they can be competitive in $8-10 billion
deals and more than that potentially,” Hamdan said.

Private equity firms will instead have an opportunity to
buy units spun off from larger conglomerates which look to
break up, said Morgan Stanley’s Dotson.

“I think where we’ll see financial buyer activity is in
negotiated one-off transactions, although those are rare and
hard to come by, and much more in the divestiture world, where
we see some of these larger companies selling off non-core
businesses,” Dotson said.

“We’re going and talking to everyone about if you have
non-core assets, you should think about selling them, because
now is a great time to take advantage of this financial buyer
bid out there. Every auction of a moderately sized business, $3
billion and lower, is flooded with financial buyer interest,”
he said.
(For more on the Reuters Global Mergers and Acquisitions
Summit, see [ID:nN01283917])
(Reporting by Soyoung Kim, Nick Zieminski and Megan Davies in
New York, editing by Matthew Lewis)

Reuters Summit-Spin-offs to boost industrial dealmaking