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Whitworth's Relational buys SPX stake in industrial focus

Ralph Whitworth's Relational Investors LLC disclosed a stake in SPX Corp., expanding its industrial holdings, and urged the pump maker to sell assets and hone its acquisition strategy.

San Diego-based Relational reported an 8.76 percent stake in Charlotte, N.C.-based SPX (NYSE: SPW), which also makes transformers and thermal equipment for power generation, according to a filing Monday, making it the second-largest shareholder behind BlackRock Inc. (NYSE: BLK)

"Despite the company's attractive business mix, total shareholder returns and profitability have lagged peers' due primarily to excessive prices paid for acquisitions," Relational said.

SPX would be worth at least $100 a share by breaking up the company and unlocking value at the pump and valve business, known as Flow Technology, said Brian Langenberg, principal and director of research at Chicago-based Langenberg & Co. SPX's profit margins have trailed peers, he said. Operating margins in 2012 were 6.3 percent compared with 16 percent for Illinois Tool Works Inc., according to data compiled by Bloomberg.

"With SPX, you've got about a $5 billion revenue stream that generates single-digit margins," Langenberg, who has a hold rating on the shares, said in a telephone interview. "In this environment, that's going to attract some attention."

Flow business

SPX, whose flow business includes customers such as Coca-Cola Co. (NYSE: KO) and Exxon Mobil Corp. (NYSE: XOM), rose 0.44 percent to $79.81 at 1:04 p.m. in New York on Tuesday. The stock had advanced 14 percent this year through Feb. 22 compared with a 6.3 percent gain for the Standard & Poor's 500 Index.

Jennifer Epstein, a spokeswoman for SPX, declined to comment.

Since January 2012, Relational, which was founded in 1996 by Whitworth and David Batchelder, has taken a stake in Timken Co. (NYSE: TKR) to urge the bearings maker to spin off its steel unit and used shareholdings in to persuade Illinois Tool to sell assets and consolidate business units.

Langenberg cited the 2011 acquisition of ClydeUnion Pumps for 700 million pounds ($1.1 billion) as one example of a faulty purchase, saying SPX overpaid by at least $300 million.

In December SPX ended talks to buy rival Gardner Denver Inc. (NYSE: GDI) after shareholders balked at the deal. Investors didn't support the price, and half of Gardner Denver's business wasn't related to flow, on which SPX has said it would focus, Batchelder, also a principal at Relational, said in a telephone interview.

Profit margin

"They are going to have to regain shareholder trust," said Batchelder. "To do that, they're going to need to get back to their previously stated goal of becoming a pure-play flow business over time."

Relational said in Tuesday's filing that SPX should abandon its "growth-at-any-cost strategy," boost profit margins to the level of peers and link executive pay more to value creation.

If it fails to achieve this, "the company should explore strategic alternatives for better achieving the long-term intrinsic value of the assets," Relational said in the filing.

SPX should shed its thermal business, Langenberg said. That unit had revenue of $1.5 billion last year, according to a presentation this month. The market for SPX's transformer business is improving and should help profit as revenue rebounds, he said, adding that the flow business has the most potential.

"Flow is a pretty high multiple business," Langenberg said. "The other stuff can hide that value."

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