Cooper Industries Inc.'s decision to shed its automotive operations is intended as a positive move for the rest of the company.
But putting the auto units on the market is bound to please more than Cooper shareholders.
The split will put up for grabs a string of well-established aftermarket and original-equipment parts brands worth $1.9 billion in annual sales. Included in the package are Champion spark plugs; Wagner lighting and brake components, Anco wiper products; Moog steering and suspension parts; and related operations.
Houston-based Cooper announced earlier this month that it will exit the automobile-parts business in order to focus on its more profitable electrical-products and consumer hardware units. The automotive activity, headquartered in Chesterfield, Mo., accounted for just 34 percent of Cooper's total revenues last year.
The OEM part of the auto business saw North American sales of $360 million last year, ranking it 86th on the Automotive News Top 150 Suppliers list.
Cooper's announcement was unsettling to some in the industry, coming as it did in the wake of the news that ITT Industries Inc. may sell off large parts of its auto business. ITT announced March 18 that it launched a strategic review that could lead to the sale of one or more of its automotive units. The company wants to focus on its more lucrative pumps and electronics businesses.
Unlike ITT, which is largely a direct supplier to automakers, Cooper's products are sold predominantly in the retail aftermarket.
ITT and Eaton are largely direct suppliers to automakers. But according to analysts, both the original-equipment and aftermarket parts business are undergoing the same kind of massive consolidation. And that consolidation is expected to bring about greater efficiency and lower inventories.
'Once it ends, as inventories get worked down, you'll see some better market demands,' says Thomas Burns, who follows Cooper for Dresdner Kleinwort Benson in New York. That, he believes, will translate to more production.
'Ultimately you'll have an automotive-aftermarket business that will grow with personal income and the economy,' he says. And the companies that have merged will have a better economy of scale. 'So the business is not as bad as it appears to be at the moment.'
It is too early to say whether Cooper's auto operations will be a consolidator or consolidatee in the industry, but analysts believe that it is a premier property.
'Its margins and return on invested capital are higher than for virtually any other company in the (aftermarket) industry,' says John McGinty, analyst for Credit Suisse First Boston Corp. in New York. Cooper reported its automotive return on sales last year was 10 percent, and projected that it will rise to 10.5 percent this year.
'Our (auto) businesses are well-run businesses with opportunities to get even better,' agreed H. John Riley Jr., chairman of Cooper, in a conference call with analysts and journalists on April 3.
'We have been among the best-performing businesses in the automotive aftermarket in recent years. We expect to get nothing other than fair value' for the businesses.
Riley says he would prefer an initial public offering over a spin-off to shareholders or a piecemeal sale. An IPO would be more financially lucrative, he believes.
Potential buyers could include Tenneco Inc.'s Tenneco Automotive Division, TRW Inc., United Technologies Corp.'s UT Automotive, Johnson Controls Inc. and Magna International Inc., analysts say.
Other players that are now focusing on expanding their OEM business, such as Federal-Mogul Corp. and Lear Corp., probably wouldn't be interested in Cooper's retail-heavy operations, says Ron Tadross, analyst for Salomon Smith Barney Inc. in New York. Neither of those is eager to build up its aftermarket activity.
Regardless of whether Cooper now sells the operations outright or spins them off in an IPO, industry analysts believe the gambit is positive for both surviving Cooper units.
'The combination of operations that Cooper has now is a conglomerate that is being discounted by the stock market,' says McGinty. Investors aren't valuing automotive businesses highly at the moment, he says. 'By splitting the two pieces, Cooper is going to create a lot of value.'
Despite its returns, the auto operation is apparently dragging down Cooper's market value. Lately, McGinty says, Cooper's stock has been selling at multiples of only around 10 to 12 times projected annual earnings. Companies such as Emerson Electric that compete with Cooper's electrical-products operations are seeing multiples of 20 and more.
At the same time, he adds, allowing the automotive unit to operate on its own would allow it to become more focused and to grow on its own.