Eaton Corp. (ETN:US) is weighing a sale of its auto-parts unit to focus on its growing power and lighting operations, said people with knowledge of the matter.
The auto business, not including truck parts, may be valued at about $1 billion, said one of the people, who asked not to be named because the process is private. Eaton’s management (ETN:US) wants to exit the business and has had internal talks about seeking a buyer, two of the people said. No investment bankers have been hired to run a sale process, and the company would probably keep the truck-parts business, the people said.
Eaton, which started in 1911 building truck axles, is shifting its focus away from its transportation roots. Last year, the Dublin-based company acquired Cooper Industries Plc for $11.8 billion to expand in electrical sales, projecting that the segment would account for 59 percent of revenue after the deal. The auto unit generated about 10 percent of sales in 2012.
“At the right price, I think it makes sense,” said John Sini, a fund manager and principal at Douglas C. Lane & Associates in New York, which oversees more than $3 billion in assets, including Eaton shares. “From a strategic standpoint, especially as they’re integrating Cooper, the auto-parts segment doesn’t really fit anymore, given the size of the electrical end market.”
Sini said by telephone that he would like to see the auto-parts unit sell for more than $1 billion.
“There is no basis for the speculation on the sale of our automotive business,” Gary Klasen, a spokesman for Eaton, said today in an e-mailed statement.
Eaton shares increased less than 1 percent to $65.64 at the close in New York.
Eaton’s truck-parts unit accounted for 14 percent of revenue (ETN:US) last year. Starting in the first quarter of this year, Eaton combined the auto and truck units for reporting purposes.
The auto-parts unit may be valued at roughly $1 billion based on the average multiple for peers of 5 times earnings before interest, taxes, depreciation and amortization, one of the people said. The division’s Ebitda in 2012 was $220 million, with projected Ebitda for 2013 of $250 million to $300 million, one of the people said.
Eaton is trading at 14 times estimated 2013 earnings, trailing the three other members in the Standard and Poor’s 500 Electrical Components & Equipment Index.
“Eaton hasn’t had respect in the marketplace commensurate with the quality of the company and the growth rate of the company,” said Eli Lustgarten, a St. Louis-based analyst at Longbow Securities who recommends buying the stock.
Without the auto unit, Eaton’s valuation could improve because “electrical companies are valued incredibly higher than more diversified, more cyclical kinds of companies,” he said in a telephone interview.
Eaton expects the auto business to attract bidders because car sales are on the rise and there is still growth potential, said two of the people. Still, sales for the vehicle group dropped 11 percent to $939 million in the three months ended March 31.
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