ITW Divests Decorative Surfaces

Zacks

Industrial tool-maker, Illinois Tool Works Inc.’s (ITW) recently announced a major 51% divestment of its stake in its Decorative Surfaces division to a fund managed by Clayton, Dubilier & Rice, LLC (CD&R). The news was well received by the market as the stock gained momentum after the announcement.

The transaction includes Wilsonart and related international businesses, which post divestment, will form a new company named Wilsonart International Holdings, LLC. Illinois Tools will be getting roughly $1.09 billion in cash, comprising $395 million raised through CD&R’s equity investment and the rest through borrowings, and a 49% stake in Wilsonart International Holdings.

The divestment will help Illinois Tool allocate free resources to its core businesses and also earn from its stake in the laminate business. Completion of divestment is expected in the fourth quarter 2012. Till the third quarter, the company’s Decorative Surfaces results will be reported as usual, while post the completion of the transaction, equity interest in the same will be accounted for using equity method.

Illinois Tool, for the time being, has reiterated its third quarter earnings per share guidance of $1.03-$1.11. The Zacks Consensus Estimate for the third quarter 2012 stand at $1.06, up 6.2% year over year. Estimates for 2012 and 2013 are at $4.12 and $4.51, representing year-over-year growth of 0.94% and 9.57%, respectively.

Decorative Surfaces division produces decorative surfacing material for furniture, office and retail space, countertops, flooring and other applications. It mainly serves the commercial construction (55%), renovation construction (30%) and residential construction (14%) end markets. The division reported revenues of $1.1 billion in 2011.

Illinois Tool Works is one of the leading manufacturers of industrial products and equipment operating through 800 business units in 57 countries. It competes with companies like Cooper Industries plc (CBE), General Electric Co. (GE), and Manitowoc Co. Inc. (MTW).

We currently maintain a Neutral recommendation on Illinois Tools. The stock also bears a Zacks #4 Rank, implying a short-term Sell rating.

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