ITT split creates intriguing but pricey M&A targets

NEW YORK (Reuters) - New smaller companies to emerge from the breakup of ITT Corp (ITT.N) could draw takeover interest from rivals that might have been deterred previously by the size of the storied conglomerate that makes everything from water pumps to military night-vision goggles.

Following the 1995 breakup that created the smaller ITT of today, the conglomerate announced plans on Wednesday to shrink yet again -- by splitting into three companies each focused on water, military information technology and industrial businesses.

While a spin-off is tantamount to putting out "for-sale" signs in many cases, heavy taxes associated with a sale means that ITT will move forward with plans to complete the breakup by the end of the year, several bankers said.

Once the new structure is in place, however, several defense and water industry giants could set their sights on the newly independent segments of the conglomerate, they said. The bankers spoke on condition of anonymity because they were not authorized to speak with the media.

"ITT clearly did an internal analysis and concluded that a tax-free spin-off was the most efficient way to go. That doesn't mean that people can't make unsolicited offers for each of the properties," one of the bankers said.

"In the interim period before the things are spun out, however, it will be a significant challenge for anybody to get something done," the banker said.

Top defense contractors including Northrop Grumman Corp (NOC.N), General Dynamics (GD.N), Raytheon Co (RTN.N) and BAE Systems (BAES.L) may eye ITT's defense segment, which represents half of its business with estimated 2011 sales of $5.8 billion, bankers and analysts covering the sector said.

But it is a big bite and it remains to be seen if any prime contractor would be interested in buying all of the businesses, a second banker said.

Based on the industry trading multiples of 5-6 times earnings before interest, tax, depreciation and amortization (EBITDA) and the unit's EBITDA of $879 million, the new defense company could have a market value of roughly $5 billion, according to Wedbush analyst David Rose.

"No doubt that all the primes certainly would look," the banker said. "Is any of them going to write a check for what it takes to buy the defense business? It's not clear."

WATER BIGGER BITE

ITT's water business has smaller revenues with estimated 2011 sales of $3.6 billion, but industry peers such as Pentair (PNR.N) are trading at multiples of around 9.5 times EBITDA or more, reflecting stronger growth prospects compared to defense.

Based on that multiple, the ITT water business could be worth as much as $7 billion, Wedbush analyst Rose said. That means there is only a limited universe of buyers who could afford to buy the asset.

Pentair, Flowserve (FLS.N), General Electric Co (GE.N), Danaher Corp (DHR.N) and 3M Co (MMM.N) are the major players in the sector.

A person familiar with the matter said that there have been no conversations on the M&A front leading up to the announcement on Wednesday and it would be up to the new board of each trading company whether they would consider any sale offers.

"Each company, the board will determine what the best course of action will be for shareholders as their new lives unfold," that person said.

Lazard Ltd (LAZ.N), a long-time adviser for ITT, advised the conglomerate on the spin-off along with JPMorgan Chase & Co (JPM.N).

(Reporting by Soyoung Kim, additional reporting by Karen Jacobs; Editing by Bernard Orr)