Cummins explores ‘range of options’ for filtration business

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By Andy East

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Cummins Inc. plans to explore strategic alternatives for its filtration business, including potentially spinning it off into a separate company or selling it altogether.

The business, headquartered in Nashville, Tennessee, was founded in 1958 as the Seymour Filter Co. and currently designs, manufactures and sells air, fuel, hydraulic and lube filtration as well as chemical technology products for diesel and gas-powered equipment around the world, according to its website.

Cummins Filtration employs approximately 4,000 people worldwide, said corporate spokesman Jon Mills.

On Tuesday, Cummins Chairman and Chief Executive Officer Tom Linebarger told financial analysts the company is exploring “a range of options” for the business unit but said Cummins thinks it can stand on its own or be part of another bigger company.

The filtration business accounted for $1.2 billion of the company’s roughly $19.8 billion in sales last year, according to filings with the U.S. Securities and Exchange Commission.

“We’re exploring everything from a sale to a spin (off) to some other kind of strategic option,” Linebarger said Tuesday. “The business is doing great. The management team is outstanding. We’re really proud of the achievements of that business. We just think it can operate separately from us more effectively going forward.”

Large companies often opt to sell or spin off smaller business units for a variety of reasons, including allowing the business unit to unlock its full potential, develop more quickly or to allow the larger company to streamline other operations.

A spin-off is when a company separates a part of its operations and forms a standalone business entity, according to Investopedia. Generally, investors of the larger company automatically become shareholders of the new entity.

Cummins said its board and management believe a separation could result in material benefits for Cummins Filtration, including, among other things, a sharpened strategic focus and increased operating flexibility and resources to capitalize on growth opportunities.

Either selling the business unit or spinning it off could ultimately offer some benefits to Cummins and its shareholders, said Roger Lee, a senior research analyst with Columbus-based Kirr, Marbach and Co.

“If they were to sell the business, that could be $1 billion-plus that can be allocated to their new energy initiatives,” Lee said. “Or separately, if they spun it out, if they just kind of did a tax-free separation, that company can end up growing into a bigger company on its own and then (Cummins) shareholders could actually benefit if that becomes a fast-growing business.”

Additionally, if Cummins Filtration was a standalone business entity, its management team could end up being “a little more scrappy” and go after new business opportunities it might not otherwise pursue if it were a smaller part of a large company, Lee said.

Cummins officials did not announce an estimated time table for when any decisions would be made but said what ultimately is decided “is dependent upon business and market conditions, along with a number of other factors and considerations.”

“The company has come to a size and performance level now where we think it can stand on its own or it could be part of another bigger company that plans more diversification in other end markets,” Linebarger said Tuesday. “We are looking at all those options.”

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