Relational Investors calls for a Manitowoc spinoff (Part 6 of 8)
Relational Investors recently disclosed an activist position in Manitowoc (MTW). The fund expects to unlock shareholder value by splitting up the company’s Foodservice equipment business and the Crane business. This should lead to “improving operating margins and consequently earnings per share in both businesses.”
Relational Investors further added that it believes “the company’s expected annual future free cash flows make capital allocation an increasingly important component of equity value creation.” It further said it has 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.” Further, based on Manitowoc’s current valuation, the fund said it believes “share repurchases represent a low-risk, high-return hurdle against which all alternative uses of capital, particularly acquisitions, must be benchmarked.”
Manitowoc’s board declared an annual cash dividend of $0.08 per share in October last year. Its dividend yield stands at 0.24%.
Manitowoc’s debt reduction efforts
Relational Investors also said in its 13D filing that it expects the company will “structure all future debt financings to mitigate the cost of a spin-off of the Food business.”
In 2013, the company said it repaid approximately $257.9 million of debt. This was well in excess of the targeted level of $200 million.
A release from S&P in February said it had raised the company’s corporate credit rating, adding “the upgrades reflect Manitowoc’s improved operating performance and credit metrics in recent quarters as a result of the gradual recovery in its crane end markets, the modest improvements in its food service segment, and the greater-than-expected debt reduction.”
The release further said, “Operating conditions in the crane end markets are stabilizing and construction activity is increasing, in our view, both in the U.S. and abroad. We believe this will continue, and Manitowoc should continue to benefit from the increased activity and from modest improvements in its steady food service segment.”
Spinoffs have gained popularity as a method to unlock shareholder value, especially among activist investors.
Earlier this year, Casablanca Capital pushed Cliffs Natural Resources (CLF) to spin off the company’s international assets.
Pinnacle Entertainment (PNK) has seen activist investor Orange Capital LLC urge the casino operator to spin off its properties into a real estate investment trust (or REIT).
JANA Partners opened an activist position in Oil States International (OIS) last year. The fund was instrumental in the recent spinoff of the company’s accommodation business, Civeo (CVEO).
You can gain exposure to spinoffs by investing in the Guggenheim Spin-Off ETF (CSD). This ETF tracks companies that have spun off within the past 30 months. The ETF has returned 379% since March 2009, market bottom, compared to the SPDR S&P 500 (SPY), which returned 213% over the same period.
Browse this series on Market Realist:
- Part 1 - Relational Investors goes activist on Manitowoc
- Part 2 - Overviewing Manitowoc’s businesses ahead of a possible spinoff
- Part 3 - Why the slowing recovery could impact Manitowoc’s Crane business
- Investment & Company Information
- Relational Investors