In an unexpected move, Rockwell Automation said it will sell off its Power Systems business, a division that generates about $1 billion in annual revenue.
The Milwaukee-based company will auction off its Dodge mechanical and Reliance Electric motors and motor repair services businesses, which account for 95% of its Power Systems business. The remaining 5% comprising Reliance-branded drives will be retained as part of the Rockwell Automation's Controls business.
The announcement, made via webcast to the financial community on Tuesday, came as a surprise, since Rockwell had not indicated in previous financial guidance that it intended to divest the business. The move, officials said, is designed to enhance shareholder value, as well as to fortify Rockwell's investments in its controls business, which accounts for the majority of the company's $5 billion in revenue.
"Our desire is to allocate the lion's share of Rockwell Automation's capital investments to accelerate the Integrated Architecture," Rockwell CFO James Gelly said during the briefing. "This is the right thing to do for both Control and Power Systems."
The Reliance Electric business, based in Greenville, SC, entered the Rockwell fold in 1995 when it was acquired for $1.6 billion. Dodge mechanical was also part of that transaction. It is a strong, profitable business -- as is Rockwell Automation as a whole. As a result, industry observers don't see the divestiture as a desperate act to raise money. Rather, it is seen as a move designed to enhance corporate synergy.
"Certainly Rockwell financials are solid," said Craig Resnick, an analyst at ARC Advisory Group, in an interview. "By no means is it an issue of them needing to raise cash. ... I think it was just [Rockwell executives] asking, 'What are we doing? Either we get serious and invest in the business for the long term or we say it's not a core part of business.' They rationalized, but there's nothing sinister about it."
In fact, Resnick said, it will be easy to uncouple the Power Systems business because it has been treated as a separate P&L center with its own distribution channels. If Rockwell finds the right buyer, it could be a win-win for both businesses.
Rockwell Automation officials said there are currently no prospective buyers, which is why the company has retained New York investment banking firm Sagent Advisors Inc., to help with the sale process. In his comments to financial analysts, Gelly said it is bad luck to speculate on the ultimate sale price, and, given that there are no negotiations, it's tough to pinpoint a timeframe. However, he did say Rockwell is working under the assumption that the transaction would be conducted as a cash sale that would close by the fourth quarter.
Ultimately, the decision to divest the Reliance and Dodge businesses is a move forward, not a step backward, for all parties, Rockwell contends.
"Both the Power and the Control business are deserving of capital investment to fuel growth, and both will benefit from ownership [dedicated] exclusively to their respective strategies," said Matt Gonring, Rockwell Automation's vice president of global marketing and communications, in an interview.
Control Systems, he explained, is growing organically, and has a strong sales pipeline. "Our approach, in terms of capital allocation, is first we favor high-investment organic growth initiatives, but we also are focused on acquisitions that catalyze organic growth, [including] smaller niches that expand the functionality of the control and information architecture, or give us greater market access, or domain expertise," Gonring added.
The cash expected to be generated by the Power Systems divesture doesn't change that strategy, he noted. "We won't compromise our disciplined approach to acquisitions simply because we have more cash."