3/13/02: TRW SpinOff of Auto Unit
Wednesday March 13, 1:12 pm Eastern Time
TRW Snubs Northrop, Sets Unit Spin-Off
By Tom Johnson
NEW YORK (Reuters) - Auto parts maker and defense contractor TRW Inc. (NYSE:TRW - news) on Wednesday again rejected a $6 billion takeover offer from defense giant Northrop Grumman Corp., calling it inadequate, and said it plans to spin off its auto parts business instead.
Shareholders of Cleveland-based TRW now must choose between the Northrop offer and a TRW management plan to break up the company.
Northrop had no immediate comment, but analysts said it would likely come back with a higher offer. Its bid of $47 a share is below TRW's share price.
``We believe that the (auto parts) spin-off creates much greater shareholder value and that's why we are heading down this course,'' TRW Chairman and interim Chief Executive Officer Philip Odeen told Reuters in an interview.
``We have two pure-play companies (auto parts and defense), both of them with strong technologies with lead positions in their markets, and we believe each of them will be valued appropriately at the high end of the multiples for their peers,'' he said
Northrop previously said it had no interest in TRW's auto parts business.
TRW executives that said by spinning off the auto parts business and selling the Aeronautical Systems Group, TRW could reduce its $5 billion of debts by up to $2 billion this year and boost shareholder value.
``Research analysts look at this company and its three component parts and value the sum of its parts in the range of the mid-$50s up to $60 per share,'' Robert Swan, TRW's chief financial officer, said on a conference call. ``This plan is about unleashing the value in the sum of the parts.''
TRW shares were up 83 cents at $51.11 at midday on the New York Stock Exchange.
``Who knows better how to value these two companies (auto parts and defense) than we do?'' Odeen said. ``We know we have the right answer.''
TRW did not provide valuation estimations for any of its units or detail how its $5 billion debt load would be divided among the different divisions. But company officials said they intended to keep a rating of ``investment grade'' on each division.
``What (Odeen's) doing with the split-up is he's letting the shareholders value them as opposed to some other company,'' said Andrew Casey, an analyst with Prudential Securities.
``I'm not sure what (Northrop's) going to do. But if they really want the business, I would assume that they would have to pay some sort of premium above $51 to $52 (per share),'' Casey said. ``I think the TRW plan is, at this point, credible.''
SPIN OFF PLANS SET
Northrop (NYSE:NOC - news) made public its offer for TRW late last month. TRW's board rejected the bid on March 3. Los Angeles-based Northrop then said it would take the offer directly to TRW shareholders, forcing TRW to reconsider the proposal.
Northrop said that after acquiring TRW it would separate TRW's auto parts business, which it said was not a good fit with either TRW or Northrop.
Northrop's share-swap takeover offer expires at midnight on March 29.
Northrop shares were up $2.37 to $111.84 at midday on the
NYSE.
TRW said it intends to spin off its auto parts business, which generated sales of about $10 billion last year, into an independent company within six to nine months.
It also said it was in early talks on a possible sale of its Aeronautical Systems Group, a manufacturer of aeronautical parts ranging from cargo systems to engine and flight controls. It gave no additional information.
TRW's breakup plans come as no surprise; the company indicated previously it was reviewing its options on the auto parts business, which accounted for nearly two-thirds of TRW's sales last year. TRW's space and information technology operations have higher margins.
TRW said it was in talks with third parties about the possible sale of all or a portion of the auto parts business. Industry sources have told Reuters that recently several parties have shown an interest in buying the business.
TRW had talks with private equity firm Blackstone regarding a possible sale of the business before Northrop approached TRW with its takeover offer.
But Odeen, while not ruling out a sale of the business, said a spin-off is the company's top priority.
TRW's plans to restructure come at a time when its chances of getting a white knight to rescue it from Northrop appear to be decreasing.
The U.S. government has informally discouraged defense and aviation groups Boeing Co. (NYSE:BA - news) and Lockheed Martin Corp. (NYSE:LMT - news) from making rival offers for TRW, citing antitrust concerns, according to sources familiar with the situation.
Analysts have also mentioned Honeywell, General Dynamics Corp. (NYSE:GD - news) and the BAE Systems Plc (quote from Yahoo! UK & Ireland: BA.L) of Britain as potential bidders for TRW.
TRW said it had hired an executive search firm to help it find a new chief executive to fill the vacancy left by David Cote, who resigned suddenly, two days before Northrop unveiled its takeover offer, to take the helm at diversified manufacturer and arms contractor Honeywell International Inc. (NYSE:HON - news). |
