Ingersoll-Rand to Spin Off Security Business

Ingersoll-Rand PLC (IR) yielded to pressure from activist investor Nelson Peltz to break up the industrial conglomerate by agreeing to spin off its building locks business.

The company also revealed Monday that it will buy back $2 billion of its stock and increase its quarterly dividend by 31% starting early next year. The business realignment will narrow Ingersoll's focus to its heating and air conditioning equipment lines and industrial businesses that include power tools, air compressors and truck trailer refrigerators. The company's annual revenue is projected at $12 billion.

The new security company, which will be a public company spun off to Ingersoll shareholders, will comprise commercial and residential lock brands that include Schlage, Dexter and Kryptonite. The new company is expected to have annual revenue of about $2 billion. The securities business accounts for about 14% of Ingersoll's current revenue.

"We believe the spinoff of the security business will improve value for both companies and shareholders," said Chairman and Chief Executive Michael Lamach during a conference call with investors. "I'm excited about it. We're feeling pretty good about the choices we've made and the go-forward plan."

The spinoff is the latest step in a business transformation at Ingersoll that dates to 2007, when the company began a move away from cyclical industrial end-markets and toward more-consumer-driven product lines. That year, Ingersoll, which is based in Ireland, sold its construction-equipment and road-paving machinery businesses.

In 2008, the company acquired heating and air-conditioning company Trane for $10 billion. But the timing of the purchase proved to be horrendous, as demand for climate-control systems plunged during the recession when construction activity collapsed. A sluggish recovery in demand continues to weigh on Ingersoll, though the company is widely viewed as being well-positioned to benefit from an upswing in construction activity.

Ingersoll expects the spinoff will take about 12 months to complete and cost $150 million to $250 million. At the same time, Ingersoll will revamp its capital structure to accommodate $2 billion of stock buybacks that will commence in 2013 and be completed in the first quarter of 2014. The company said it expects to borrow money to finance the stock purchases.

"We generate significant free cash flow even in tough economic times." Mr. Lamach said.

Mr. Lamach said the changes unveiled Monday were the result of a strategic evaluation of the company's businesses that began during the summer, partially under pressure from Trian Fund Management LP, which purchased a 4.5% stake in Ingersoll stock this spring. Mr. Peltz, co-founder of Trian, presented the company executives with a proposal for splitting Ingersoll into three standalone companies. Mr. Peltz argued that Ingersoll's stock was significantly undervalued because of the company's current configuration.

Mr. Lamach said Mr. Peltz's proposal and several other scenarios were considered as part of the evaluation. The limited breakup unveiled Monday represents a compromise between maintaining the company's current structure and pursuing Mr. Peltz's more aggressive proposal of creating three separate companies.

Activist investors have been targeting industrial conglomerates in recent years, arguing that the companies' mix of businesses impedes growth and holds down conglomerates' stock prices.

But analysts say the benefits from dismantling Ingersoll are limited, noting the company's stock price adequately reflects the value of the company's parts.

"Ingersoll-Rand is not screaming at us as a candidate [for breakup]," said Deane Dray, a multi-industry analyst for Citi Investment Research. "On a sum-of-the-parts basis, there's no parts that need to be unlocked."

Analysts estimate the price of new security company's stock at about $10 a share, with the remaining parts of Ingersoll worth about $40 a share.

"We like the idea of a big share [repurchase], but spinning off security ... makes little sense," said Jeff Sprague, an analyst for Vertical Research Partners, which dropped its rating on Ingersoll to sell from hold Monday with a $46 target price.

Mr. Sprague noted that Mr. Peltz's leverage to advocate for a bigger breakup of Ingersoll has been diminished by the company's recent improvement at lowering its costs and expanding margins. Investors have responded to the improvement by raising the Ingersoll's stock price by about 60% since the beginning of the year.

But Ingersoll's shares were recently trading down 0.33% at $48.53 a share, suggesting that some investors opted to lock in their profits and bail out of the stock.