ITT to break itself up, fueling share rally

ATLANTA (Reuters) - U.S. manufacturer ITT Corp (ITT.N) plans to split itself into three companies to take advantage of growing water management and industrial markets as its defense unit braces for U.S. military spending cuts.

The diversified conglomerate is the latest in a string of companies that have moved to split up their operations, including Fortune Brands and Motorola.

ITT shares rose as much as 18 percent on Wednesday, reaching their highest point since the fall of 2008.

"We are theoretically at the beginning of a recovery in the commercial and industrial end markets, so the timing is good on that front," said Robinson Humphrey analyst Peter Skibitski.

After the split, ITT Corp will continue as an aerospace, transportation, energy and industrial engineering company. Another company will make water pumps, and the third will supply defense equipment.

Last month, ITT said the businesses that supply water pumps and products for transportation markets would drive earnings in 2011. It said revenue and operating income would rise in those two segments, but fall in defense, the company's largest unit.

Skibitski said uncertainty about ITT's defense business because of expected U.S. budget cuts held back the share performance. With the share rise on Wednesday, ITT's value is about $11 billion.

U.S. Defense Secretary Robert Gates last week said he plans to cut $78 billion from the nation's military budget over the next five years because of the government's growing budget deficit.

Sales in 2009 were about $3.4 billion for the water business and $1.3 billion for the unit that supplies airplane and other transportation markets. The defense unit accounted for more than half of 2009 company sales with revenue of $6.3 billion.

Shareholders will own stock in all three companies, which likely will be traded on the New York Stock Exchange.

Chief Financial Officer Denise Ramos will be CEO of the new ITT, which will supply airplane parts and products for energy and other commercial markets.

David Melcher, head of the defense unit, will lead the new defense company. Gretchen McClain, president of the fluid and motion businesses, will be CEO of the water business, and current ITT CEO Steve Loranger will serve as its executive chairman.

BREAKING UP IS EASY TO DO

The White Plains, New York-based company was created as International Telephone & Telegraph in 1920 and is in its current form after a three-way split in 1995.

At one time, it owned a variety of companies, from Sheraton Hotels to Continental Baking -- the maker of Wonder Bread. From 1960 to 1977, it made 350 acquisitions.

ITT made headlines in U.S. political circles decades ago over allegations that the Justice Department settled an antitrust suit against the company in return for a $400,000 donation to help fund the Republican National Convention in San Diego in 1972. The GOP moved that event to Miami.

ITT's move follows other corporate spin-offs. Spirits company Fortune Brands FO.N said last month it would spin off or sell its golf unit and spin off its home products division. Motorola Inc split into two technology companies that began formal trading this year MMI.N (MSI.N).

General Electric Co (GE.N) this month expects to close its sale of a majority stake in NBC Universal media to Comcast Corp (CMCSA.O), marking its exit from a business that investors long said fit poorly among its industrial franchises.

ITT's announcement appears likely to head off a proxy fight with Relational Investors LLC, an activist firm that had nominated three directors in a November letter and had urged a sale of the defense business.

"The steps (taken by the company) will likely have averted a proxy contest," Relational Investors co-founder Ralph Whitworth told Reuters.

Whitworth said Relational would take the spinoff into consideration and decide whether to withdraw the nominations.

Relational, which holds 3.9 percent of ITT, had earlier asked the company to spin off the basic industrials segment and sell the defense business to a private equity firm, he said.

ITT CEO Loranger told a conference call that the breakup had been considered for six months and was made by the management and board with no investor pressure. He said the move would "unlock value" of the three businesses and clarify their market focus.

Pro forma 2011 revenue for the future ITT Corp is estimated at $2.1 billion, the company said.

ITT expects to complete the breakup by the end of the year. Lazard and JPMorgan Chase advised the company on its plan.

ITT shares, which had gained 10 percent in the past three months, rose 16.5 percent, or $8.72, to end at $61.50 on the New York Stock Exchange on Wednesday.

(Reporting by Karen Jacobs in Atlanta, Nick Zieminski and Soyoung Kim and Nadia Damouni in New York, Scott Malone in Boston and Bijoy Koyitty in Bangalore. Editing by Sriraj Kalluvila, Robert MacMillan and Bernard Orr)