Pentair: The Next Serial Acquirer?

After losing its very public battle to break up DuPont (NYSE: DD) into multiple companies, $11 billion activist hedge fund Trian Fund Management LP and its CEO, Nelson Peltz, are trying a different tact with a different company.
This time the target is U.K.-domiciled Pentair PLC (NYSE: PNR), in which Trian has accumulated a 7.2% stake. Pentair is a manufacturer of pumps and valves. Their products are widely used, including in the oil industry.
Surprisingly, Trian is urging the company to grow, grow, grow and not shrink as it usually urges its targets to do.

Company on Board

Trian co-founder Ed Garden even took to CNBC’s airwaves. He urged Pentair to use its tax advantages (thanks to the U.K. domicile) to make acquisitions in this very fragmented industry.
Garden even went so far as to call Pentair the next Valeant Pharmaceuticals International (NYSE: VRX). Valeant is a serial acquirer of companies in the generic drug and medical device sectors.
The good news for Trian is that it found a sympathetic ear in Pentair chairman and CEO Randall Hogan, who said in May that he wants to increase Pentair’s market capitalization to $20 billion from about $11.5 billion. Hogan also wants to boost sales to $10 billion from an estimated $6.5 billion this year.

Pentair Stuck in a Rut

Trian’s strategy makes sense.
Despite the very successful integration of the pump and filter business of Tyco International PLC (NYSE: TYC), Pentair has struggled to post impressive results.
Its first-quarter earnings decline of 8% year-over-year was due to the slowdown in the oil industry. Its oil and gas segment – about 20% of sales – will likely remain in the doldrums. As will sales to the power and mining industries – another 8% of sales. And its industrial sales, Pentair’s largest segment (almost 30%), will also be weak with slowing global industrial activity.
Pentair should be able to find profitable synergies in acquisitions. Trian’s Garden estimates it should achieve synergies of 5%-10% of sales with each purchase.
But the real problem may be finding suitable and sizable enough targets.

Possible Pentair Targets

Thus we have the game starting on Wall Street as to whom Pentair will go after. CEO Hogan has said in the past he was looking at the general industrial space and the food space.
That translates to a whole lot of possible targets. Here is just a partial list of industrial companies that have suffered as Pentair has, and whose stocks are relatively cheap:

• SPX Corp. (NYSE: SPW) has three segments – flow technology, industrial products and thermal equipment. It is splitting off its flow business, which serves the food and beverage industry. That may pique Hogan’s interest.
• Dover Corp. (NYSE: DOV) is also in the energy sector, not to mention engineered systems, fluids and refrigeration and food equipment.
• Flowserve Corp. (NYSE: FLS) also has exposure to energy. Its other segments include water resources, power generation, chemical processing and general industrial.

Other industrial companies, with higher corporate tax rates, include: Parker Hannifin (NYSE: PH), Middleby Corp. (NASDAQ: MIDD) and IDEX Corp. (NYSE: IEX). These are all possibilities to become prey of a hungry Pentair, prodded on by Trian.   
Happy hunting to Randall Hogan.

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