Breaking Up Is Easy to Do
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Carpenters had it completely wrong! Breaking up is easy to do. Some companies have business segments that are prefect for each other. A match made in heaven, even. Manitowoc Company (NYSE: MTW) is not one of those companies. It is difficult to understand the logic behind having construction cranes and foodservice equipment under same corporate umbrella. The two divisions operate in different industries, sell to different customers and benefit from different economic factors. But that is precisely what Manitowoc has done with Manitowoc Crane and Manitowoc Foodservice. These two divisions go together like peanut butter and motor oil. It just might be time for this corporate pairing to go their separate ways.
Manitowoc is no stranger to corporate breakups. In 2009, the company sold off Manitowoc Marine, its commercial and military shipbuilding and repair division. Seemingly this would have been the perfect time to further simplify the company by spinning-off one of its remaining two divisions. But around this same time, Manitowoc Foodservice acquired the UK multinational foodservice equipment manufacturer Enodis PLC, essentially doubling down on this mismatch of a corporation.
The Manitowoc Crane division was hit hard in 2009 thanks to the global economic slowdown. The slowdown sent the division’s operating earnings tumbling from $557 million in 2008 to a low of $91 million in 2010, with operating margins falling from 14.3% in 2008 all the way to 5% in 2011. No surprises there. When economies around the world slowdown, particularly in Europe where Manitowoc receives about 20% of its revenues, numbers like these for construction equipment companies will tend to occur.
About 65% of Manitowoc Crane’s end market revenue is derived from energy and infrastructure. Energy and infrastructure spending has seen a gradual rise globally, which is very favorable for Manitowoc’s rough terrain cranes, telescopic cranes, lattice-boom crawler cranes and others. Recently Manitowoc has instituted initiatives to better serve new regional markets, like its new facilities in Mexico and Brazil to better serve the Latin American region or its new joint venture in China for the Asia-Pacific region. Together with increased energy and infrastructure spending and these new emerging market initiatives, Manitowoc Crane is expecting to grow by high single-digits in 2013.
The Manitowoc Foodservice division was hit nowhere near as hard during the global slowdown and their acquisition of Enodis PLC in October 2008 came at the right time. Operating earnings for the Manitowoc Foodservice jumped from $59 million in 2008 to $164 million the next year, all the way to $239 million in 2012. More importantly, thanks in part to removing a global competitor from the marketplace, operating margins increased from 10% in 2008 to 16.1% in 2012.
About two-thirds of the Manitowoc Foodservice’s revenues are from the restaurant industry. If you ever worked in a restaurant kitchen, there is a fair likelihood that you have seen many of Manitowoc Foodservice’s products. These products include grills, griddles, deep fryers, steamers, buffet counters, walk-in refrigerators, ice cream counters, soda and juice beverage dispensers, ice dispensers and beer towers (to name only a few of their product types). Essentially everything you need to operate a restaurant kitchen, Manitowoc Foodservice sells. The company also makes and sells products to grocery stores, school and hospital cafeterias and to the travel industry with products such as those hotel ice dispensers you see on ever floor of every hotel.
Manitowoc Foodservice has and will continue to benefit from the growing emerging-market middle-class around the world. As multinational and regional restaurant chains expand their footprint into Asia, Latin America, Africa and the Middle East, Manitowoc expands along with them. The growth of companies like McDonald’s into Brazil or Yum! Brand’s KFC into China is in turn growth for Manitowoc Foodservice.
The Conglomerate Discount
Aside from the two divisions having absolutely nothing to do with each other, there are good reasons why Manitowoc Crane and Manitowoc Foodservice would greatly benefit from going their separate ways.
Companies with one or more disparate businesses segments often are valued at what is known as a “conglomerate discount”. The more complicated a company, the less willing investors are to give that company a higher valuation. An investor wishing to invest in heavy machinery may not want to have anything to do with foodservice equipment (and vice versa). For companies like Manitowoc, the whole of the company can sometimes be worth significantly less than the individual parts. If we take a look at some of Manitowoc’s direct competitors, this becomes clearer.
All together Manitowoc trades at about 20 times earnings. Terex (NYSE: TEX) is a competitor of Manitowoc Crane. Terex is a fellow maker of crane equipment, as well as maker of other heavy machinery. As a pure play heavy machinery company, Terex Corporation trades at about 30 times earnings. The same can be said about Middleby (NASDAQ: MIDD), a competitor of Manitowoc Foodservice. Middleby is a foodservice equipment maker with a range of products and customers very much similar to Manitowoc Foodservice. As a pure play foodservice equipment company, Middleby trades at an earnings multiple of about 25.
There are of course no guarantees that a broken-up Manitowoc would trade at the exact same valuations as pure plays like Terex and Middleby. While there no guarantees, it would certainly be much easier for the market to make that determination with two separate companies, rather than the one odd couple company Manitowoc is currently. If each of Manitowoc’s individual divisions did traded at similar multiples to the above mentioned competitors, Manitowoc could possibly trade at somewhere around $23 a share, about 33% higher than Friday’s closing price.
And this valuation assumes that neither of the two separate companies would be acquired at an even higher multiple. For example, The Middleby Corporation is large enough to acquire Manitowoc Foodservice. And more importantly than just being large enough, Middleby had previously attempted to acquire Enodis PLC in 2006, two years before Manitowoc acquired them. If Middleby is still interested in expanding via acquisition, it would not be surprising to one day see Middleby acquire Manitowoc Foodservice as a completely separate company.
Foolish Bottom Line
With just the stroke of a pen, Manitowoc’s management could do a lot to unlock shareholder value. By simply spinning-off the smaller Manitowoc Foodservice division, this would allow current shareholders to benefit by enticing future shareholders to bid up the shares of the two new pure play companies. Given management’s willingness to sell off Manitowoc Marine in 2009 (Manitowoc’s original 111-year old business), I see little reason why management wouldn’t at least be amenable to the idea of doing something similar with the rest of the company. Breaking up is easy to do after all, and sometimes quite profitably as well.
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Matthew Luke owns shares of Manitowoc Company. The Motley Fool recommends McDonald's and Middleby. The Motley Fool owns shares of McDonald's and Middleby. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!