manufacturing

Textron gains amid report of review that may include spinoff

TEXTRON Inc. rose to a five-month high after Reuters reported the maker of Cessna planes and Bell helicopters is reviewing strategic options that may include spinning off some businesses.
Posted 1/12/12

BOSTON - Textron Inc. rose to a five-month high after Reuters reported the maker of Cessna planes and Bell helicopters is reviewing strategic options that may include spinning off some businesses.

On Wednesday, the shares climbed 5.7 percent to $21.32 in New York, the highest closing price since Aug. 1. No strategy changes are expected soon, Reuters reported, citing people it didn’t identify. David Sylvestre, a company spokesman, declined to comment, citing a policy of not reacting to “market rumors.”

While Textron is an obvious candidate for a breakup because of a portfolio of unrelated businesses, the company “needs its diversity near term to ride out cyclical weakness at Cessna,” Jeffrey Sprague, co-founder of Vertical Research Partners, wrote in a note to clients Wednesday.

Sales at the plane-making unit dropped 55 percent in the two years through 2010 as the financial crisis and an economic slump trimmed sales. Cessna accounted for 24 percent of Textron’s revenue in 2010, down from 40 percent in 2008. The company also makes armored vehicles and unmanned aircraft.

CEO Scott Donnelly’s relatively recent arrival and his focus on improving results also weigh against a near-term breakup, Sprague wrote. Donnelly joined the Providence-based company in 2008 and became CEO in December 2009.

‘Iconic’ Cessna

“Management views internal improvements as a prerequisite to any major strategic change to maximize value,” said Sprague, who’s based in Stamford, Conn.

The business aircraft cycle would make operating Cessna as a stand-alone company difficult, “but it is an iconic franchise which would attract significant interest if it was for sale,” wrote Sprague, who has a “hold” rating on Textron’s stock.

“The defense assets of Textron may be best positioned in a larger defense conglomerate” if pressure to cut U.S. military spending continues, Sprague said.

Relational Investors LLC, led by activist shareholder Ralph Whitworth, had reviewed Textron as a possible investment opportunity in the past, without viewing it as a “serious prospect,” Reuters reported separately. Earlier, the news service said Whitworth had looked at the company about a month ago, citing an unnamed person familiar with the situation.

The cost to protect Textron’s debt from default for five years climbed to the highest since Nov. 25. Credit-default swaps on the company’s debt increased 17.8 basis points to 242.5 basis points as of 3 p.m. in New York, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

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