Manitowoc: ‘The time is right to split’

Garland induction hob

Manitowoc has announced its intent to split its business into two independent publicly-traded companies, a move that will see its foodservice division to function as a standalone operation for the first time. As one of the leading suppliers of catering equipment to multi-site operators in the UK and around the world, FEJ considers what the separation might mean for the market.

Just two days before 2014 drew to a close, legendary billionaire investor Carl Icahn increased his stake in Manitowoc to 7.77% and, through an SEC filing, promptly declared his appetite for seeing the company’s crane and foodservice equipment division to be broken in two.

While Manitowoc declined to issue any public response to Icahn’s proposal at the time, it wasn’t the first occasion that the prospect of a split had reared its head. Last summer, one of Manitowoc’s largest shareholders, Relational Investors, raised its head above the parapet to express its desire for the firm’s two core businesses to trade as standalone companies.

The idea of a break-up has traditionally been something Manitowoc has resisted, with company executives previously reported to have “vigorously defended” its organisational structure on the basis that the crane division was too prone to troughs in business to operate independently. Indeed, the $2.7 billion (£1.8billion) takeover of UK catering equipment firm Enodis that many will remember seven years ago was very much part of a strategic effort to offset the cyclical crane unit with an unrelated business.

Commentators note that as recently as December management was vehemently arguing the merits of a complementary business portfolio, making the change in strategic direction surprising and leading some to question exactly how much, if any, incremental value will be created.

It is not clear what has changed in the minds of the board — nor to what extent pressure from Icahn and Relational Investors influenced matters — but Manitowoc’s January announcement that it plans to separate the two divisions arrived much sooner than many experts were predicting.

Investment firm William Blair & Company suggests that Manitowoc has capitulated to the activists, but its research notes also shine a light on the logic behind the move. “The rationale is that Manitowoc is being undervalued by owning two non-synergistic businesses and is penalised with a lower multiple that does not appreciate the value of the foodservice business. The latest rationale from management is that each separate company could pursue its own independent, value creation strategy, unencumbered and on its own,” it stated.

Manitowoc claims a “comprehensive evaluation” was carried out before it took the decision to pursue the split, with CEO Glen Tellock insisting the company regularly evaluates and explores opportunities to optimise its performance and create value for shareholders. He said: “Over the past several years, we have transformed Manitowoc and worked to build two strong business platforms within one enterprise, and each business enjoys global leadership and is positioned for sustainable growth and value creation. After a comprehensive evaluation, including a thorough review of the current and projected operating environments for the two segments, we have determined that the businesses are best-suited to realise their full potential on a standalone basis.”

This does increase the likelihood that another firm acquires it, but it is a bit too early to speculate on that”

As a solo foodservice equipment operation, Manitowoc would be one of the largest of its kind in the world, producing commercial appliances serving the ice, beverage, refrigeration, food prep and cooking needs of restaurants, supermarkets, hotels and other institutions. With the company’s 24 catering brands, including Garland, Convotherm and Merrychef, sold in 80 markets, the business already boasts true global scale.

But what sort of impact would the move have on customers in the UK market? In the immediate term, the direct answer is very little given that the split isn’t even scheduled to be completed until the first quarter of 2016.

Indeed, a representative for the company’s UK division said that at this stage it simply has nothing further to add locally to what has already been communicated from the US, but stressed it would be happy to comment once the new structure has been developed.

Manitowoc management expect each independent company to have a capital structure and credit rating consistent with the combined company today, but details on structure, management, governance and other significant matters won’t be provided until a “later date”.

The future might seem uncertain, but restaurant customers shouldn’t fear a separation given the level of autonomy afforded to the operation already, suggests Charles Brady, director, diversified industrial equity research at BMO Capital Markets. “It has been operated as separate entity and I don’t believe a whole lot operational would change as a separate company,” he told FEJ. “It does increase the likelihood that another firm acquires it, but it is a bit too early to speculate on that.”

On paper at least, the foodservice division should transition to standalone status with sufficiently strong financial foundations. Although Manitowoc has always relied on cranes for the majority of sales (typically around 60%), foodservice delivers greater operating earnings. Equally, foodservice operating margins tend to lie in the 15% range versus approximately just 7% for cranes.

None of this is a given, of course. Latest accounts show foodservice operating earnings declined 6.5% to $234m (£153m) in 2014 even though sales rose 3% to $1.6 billion (£1 billion). Q4 sales and operating margins both fell, meanwhile, with sales dropping from $399m to $374m (£262m to £245m) year-on-year and operating earnings sinking from $69m to $48m (£45m to £31m).

In an earnings call with analysts, Tellock said the foodservice business has “robust growth potential”. Customers and investors will be watching to make sure that doesn’t change as the date of separation draws closer.

Why is Manitowoc seeking a split?

Manitowoc officials say they are determined to pursue the separation of the Crane and Foodservice businesses for a number of strategic reasons. These include:

– To better position each business to pursue individual strategies as market conditions improve.

– To enable each business to attract a long-term investor base appropriate for the particular operational and financial characteristics of each entity.

– To enable investors to value each company separately.

– To enhance the flexibility of each business to pursue distinct capital structures and capital allocation strategies to meet the individual needs of each business.

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