EUR 479.45 For Business Accounts Only

Industrials Data Plus Pre-Spin Entry Ahead of RMT Prospectus

With Ingersoll-Rand’s (IR) earnings out tomorrow (Oct 29), we expect the management to give further clarity around its Q1 2020 Reverse Morris Trust transaction with listed Gardner Denver Holdings, Inc. (GDI). With our early analysis (assuming a 1:1 ratio), we’ve explored the pre-Spin opportunity of entering now, possibility of an S&P 500 listing for new GDI as well as our longer-term view in the pure-play Climate space. As we get further intel from its first RMT prospectus, we’ll update our analysis accordingly.

What’s Happening?
Ingersoll-Rand Plc (IR) will merge its industrial business with listed Gardner Denver Holdings, Inc. (GDI) via a Reverse Morris Trust (RMT). IR will Spinoff its Industrial segment and then combine it with GDI in a tax-free manner, creating a global leader in mission-critical flow creation and industrial technologies (IndustrialCo).

IR will continue to hold the heating, ventilation and air conditioning (HVAC) and transport refrigeration segments, creating a pure-play global leader in climate control solutions for buildings, homes and transportation (ClimateCo), with an additional cash payment of $1.9bn from IR Industrial (SpinCo). The transaction is expected to go through by Q1 2020.

Presumed Timing of New Spin: For ALLE, IR announced the Spinoff on December 10, 2012 and Spun off on December 2, 2013, taking almost a full year to list. With the first Form 10 filing being released six months after its announcement date, if we use the same timing as IR’s 2013 Spin, we could expect an initial prospectus by the end of October (6 months on from its announcement on April 30, 2019) and an April 2020 Spinoff. IR’s earnings are scheduled for tomorrow (October 29, 2019).
The Edge View (IR, Parent Ex-Spin)…
After Spinning off the Industrials business, IR will likely experience a higher re-rating compared to its climate peers. The resulting pure-play dynamics in the climate industry will help IR (post-RMT) in expanding its organic sales and margins. Furthermore, as a by-product of the RMT, IR shareholders will also benefit from the positive synergies and increased scale of the Spin-merged GDI due to holding 50.1% of the new company. The $1.9bn cash transfer from the Spin-merged business to IR will also help the Parent in reducing its leverage, and provide additional firepower to raise dividends, increase share buybacks or look for lucrative acquisition targets.

The Edge View (New GDI, Spin-Merge Entity)…
The completion of IR’s Industrial business merger with GDI will propel the company to the second largest position in the list of global manufacturers of industrial pumps/compressors, behind only Swedish firm Atlas Copco AB (ATCOA SS). Additionally, the increased contribution from Industrials to the top line will help augment the value of the Spin-merged GDI on an SOTP basis because as of now, the overall value of the company is being bogged down by muted energy comps. The combination will nearly double GDI’s market cap to the range of $12bn to $14bn, raising the probability of its inclusion into the S&P 500 Index, which will expand its overall investor base to potential large portfolio managers/institutional investors.