Ingersoll-Rand To Spin Off Security Business As Peltz Wins Round One

Ingersoll-Rand To Spin Off Security Business As Peltz Wins Round One

Ingersoll-Rand PLC (NYSE:IR), the Dublin-based industrial and machinery conglomerate, has finally conceded to pressure from Nelson Peltz, activist investor and founding partner of Trian Fund Management. The company confirmed Monday that it has decided to spin off its security business, which manufactures steel door frames and locks, within twelve months. The security technology is the smallest business segment of Ingersoll-Rand, with $1.63 billion in sales and $330 million in operating profits last year.

Ingersoll-Rand To Spin Off Security Business As Peltz Wins Round One

Ingersoll-Rand PLC (NYSE:IR) has also planned a $2 billion stock buyback. The company will also increase its dividends by approximately 30 percent to 21 cents a share. For the financial year ending September 30, Ingersoll-Rand posted $14 billion in revenue.

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The dividend hikes, share buybacks, and spin-off are parts of a months long strategic review of Ingersoll’s businesses, after activist investor Nelson Peltz proposed the break-up of the company. Peltz’s Trian Fund Management acquired a 7 percent stake in Ingersoll in May, and later, Peltz joined the company’s board on August 10.

Peltz has already shaken up companies like H.J. Heinz Company (NYSE:HNZ), Lazard Ltd (NYSE:LAZ), and State Street Corporation (NYSE:STT). He thinks that the company’s earnings have been under pressure for years and the stocks are heavily undervalued. So Peltz pressured the board to break the company up, a diversion from Ingersoll’s earlier strategy of selling off the smaller business units.

However, the company’s stocks have risen over 60 percent this year, closing at $48.69 on Friday in New York trading. So, the company executives thought a full-scale break up of the company seems less attractive. It’s not the first time Ingersoll has restructured its business. Over the past two years, the company has sold off four businesses, including a majority stake in Hussman, the refrigerated display unit, to Clayton Dubilier & Rice for $200 million.

Andrew Casey, a senior analyst at Wells Fargo Securities, believes that the initiative will drive positive reaction in the stocks. After the spinoff, the company will be separated into two businesses: New IR (refrigeration, industrial, and HVAC) and New Security business (a combination of residential and commercial security businesses).

Wells Fargo & Company (NYSE:WFC) holds an Outperform rating for Ingersoll-Rand PLC (NYSE:IR). However, Bank of America-Merrill Lynch has maintained its neutral rating, arguing that there are no quick fixes for IR valuation (i.e. breakup) and execution and cyclical upturn should be the primary driver of the stock over the next 12 months. “With limited catalysts from corporate actions, “IR stock is now trading at a premium to its higher quality multi-industry peers and we see better value elsewhere, which keeps us at Neutral,” said BAML analyst Andrew Obin.

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