TRW to Fight Northrop Overture by Divesting
TRW Inc. launched a counterattack to Northrop Grumman Corp.’s hostile takeover bid Wednesday, announcing plans to break up the company itself by spinning off or selling both its automotive and aircraft parts businesses.
TRW executives said the company’s board unanimously agreed to accelerate long-held strategic plans to divest itself of non- defense-related businesses while urging shareholders to reject Northrop’s proposal to acquire the company for $47 a share, or $5.9 billion.
In its offer, Century City-based Northrop has said it would spin off or sell TRW’s debt-ridden auto parts business and keep only the space and defense electronics operations, most of which are based in Southern California and poised for significant growth as the Pentagon budget increases.
“Our board continues to believe that $47 is grossly inadequate and does not reflect the value of TRW’s advanced portfolio of technology and unique market positions,” Philip A. Odeen, TRW’s chairman and interim chief executive, said in a telephone interview Wednesday. “We believe our plan will add significant value in excess of Northrop’s offer.”
Odeen declined to say how much more the company would be worth if TRW were to implement its plan, though some analysts said the breakup value could be as low as $49 a share or as high as $60.
TRW’s move, which had been expected because it rejected the same offer last week, came before the market opened and fueled speculation among investors that Northrop would increase its bid or withdraw the offer. TRW shares rose 89 cents to $51.17 on the New York Stock Exchange; Northrop gained 43 cents to $109.90, also on the NYSE.
But Northrop Chairman Kent Kresa said in an interview that he had no such plans and that for now he would stick with the initial offer: a stock exchange of $47 in Northrop’s shares for each share of TRW stock. The offer could rise if TRW executives would allow Northrop to conduct due diligence, he said.
“We’re fully committed to the tender offer,” Kresa said. “We have no further information than what is publicly available and until we do there is no mechanism or rationale to change it.”
Indeed. Jon B. Kutler, president of Quarterdeck Investment Partners Inc., a defense industry investment bank, said Northrop had no reason to respond differently.
“Northrop started this by being opportunistic,” Kutler said, noting that Northrop made the bid for TRW just two days after TRW’s chief executive quit. The resignation precipitated a 26% plunge in TRW stock. “There is no pressure on them to raise the offer. They’re not going to get pressured into making a bad deal.”
If TRW successfully spins off the auto parts business, a feat it has unable to pull off in the past, Northrop could still come back with a hostile acquisition offer.
“Northrop could take another bite of the apple,” Kutler said.
With neither side budging at the moment, TRW’s fate will rest with shareholders, who have until April 22 to evaluate and choose between Northrop’s offer or the divestiture proposal.
As a result, analysts were scrambling Wednesday to evaluate both options, but there appeared to be little consensus as to which provided better value to TRW shareholders.
Under the TRW plan, company executives said they hoped to spin off the auto business as an independent, publicly traded company within the next six to nine months.
But first, the company would sell the aeronautical systems unit, proceeds of which would be used to pay down debt. TRW has about $5.5 billion in debt, making it one of the highest-leveraged companies in the industry. Odeen said that with the sale of the aeronautical business and other smaller, non-core operations, the company could reduce its debt level by $1.6billion to $2 billion this year.
TRW’s automotive parts business makes components including air bags, seat belts and steering systems; its aeronautical division makes a wide variety of airplane parts, from cargo rollers and jet engine valves to hydraulic systems and fuel pumps.
“TRW has been examining a potential separation of our automotive business for some time,” Odeen said. “We believe that our strategic plan ... will create two ‘pure play’ independent businesses, each positioned to deliver superior growth and returns.”
Odeen said the company has begun preliminary talks with a potential buyer for the aeronautical systems business, though he declined to provide details. He also said he was talking to several companies that indicated interest in other operations.
In a note to investors Wednesday, Prudential Securities analyst Andrew Casey called TRW’s plan a “credible alternative” to Northrop’s bid, noting that the auto business could be worth about $25 a share while the defense electronics would be valued at $27 a share, for a total breakup value of $52 a share.
“The bottom line of this analysis,” he wrote, “is that the TRW plan gives shareholders the promise of higher value” than Northrop’s $47 bid.
But Ken Blaschke, analyst with Deutsche Banc Alex. Brown, was less sure. He said he could not see the auto business fetching more than $20 a share because of the unit’s heavy debt load, and he recommended that shareholders sell TRW’s stock.
“Even if TRW does enact a spin, there is little further upside from current price levels,” he said. “Bottom line is that we believe investors should sell the stock at current levels.”
In either case, there already appears to be a potential loser: the city of Cleveland.
There is strong potential that it no longer would be home to TRW’s headquarters, culminating a decades-long exodus of major companies from a city that during its heyday in the 1960s had one of the largest concentrations of Fortune 500 companies.
