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Walter deal wins over Wall Street

The acquisition of Mueller Water Products brings Walter stock its busiest trading day and a mixed reaction from Walter's largest shareholder.

By SCOTT BARANCIK
Published June 21, 2005


A day after Walter Industries unveiled its biggest acquisition, Wall Street applauded.

Analyst Barbara Allen of Avondale Partners called the $1.9-billion deal to buy Mueller Water Products Inc. "a strong positive." Investors bid up Walter's stock 7 percent, or $2.94 per share, to close Monday at a record $48.05. It was the stock's busiest trading day, with more than 5-million shares changing hands.

But Walter's largest shareholder had a mixed reaction.

On one hand, Appaloosa Partners president David Tepper said in a rare interview Monday, privately held Mueller's addition should broaden Walter's water-transmission product line and its share of that market. Walter plans to pair Mueller, a Decatur, Ill., maker of fire hydrants and valves, with its U.S. Pipe unit, a maker of iron pipe used in municipal water systems. The two had revenues of $1.6-billion in 2004.

On the other hand, Tepper said, Mueller's arrival further confuses Walter's image on Wall Street, where it is viewed alternately as a homebuilder, a mortgage lender, a coal-mining company and a maker of iron pipe. He also doesn't like that Walter's nonwater businesses will have to share some of the debt incurred in the transaction.

The best-case scenario? Walter sells Mueller and U.S. Pipe to the highest bidder, and quickly.

"We hope that happens sooner rather than later," said Tepper, whose company holds a 15 percent stake in Walter. "There's no reason to hold this (water) business with (Walter's) other businesses, if they're noncomplementary."

Despite Appaloosa Partners' stake in Walter, Tepper's opinion has little effect on the deal. Appaloosa is not represented on Walter's board, and Walter doesn't need shareholder approval for the acquisition. Tepper declined to say Monday whether he will join fellow hedge fund Pirate Capital LLC in an attempt to unseat Walter's board next year if the company doesn't shed some of its subsidiaries.

He may not even be around by then. Most hedge funds don't hold their investments longer than a year.

For his part, Walter CEO Don DeFosset remained cagey about the company's game plan for Mueller and U.S. Pipe.

In a conference call with analysts and institutional investors Monday morning, DeFosset said the federal government is expected to continue to spend tens of billions of dollars fixing the country's aging waterworks over the next few years. He added that Walter should begin to realize cost-savings from the Mueller/U.S. Pipe pairing within two years.

But he said Walter's financial advisers would continue to explore other acquisitions or sales including, possibly, the combined Mueller and U.S. Pipe unit. "We are not signaling any specific long-term intent," he said. "I want to be clear in that regard."

Mueller, a decades-old company acquired in 1999 by Credit Suisse First Boston subsidiary DLJ Merchant Banking Partners II, is a market leader in a variety of water-related categories. According to a brochure distributed by Walter, Mueller is the No. 1 maker of fire hydrants and related valves, fittings and couplings and pipe nipples. It has an installed base of roughly 3-million hydrants nationwide and about 30 sales offices.

DeFosset said Mueller's manufacturing facilities will be able to make some of U.S. Pipe's products more cheaply, and vice versa. Mueller had 5,400 employees as of Dec. 31. Though most are union members, the company says it has not suffered a strike since 1987.

Mueller has had some problems recently.

This year it demoted its chief financial officer and delayed submitting financial statements to the Securities and Exchange Commission because of "potential accounting problems" uncovered by a whistleblower. A subsequent investigation financed by Mueller found problems with revenue recognition, inventory calculation and other accounting issues and led the company to file revised reports. Mueller's board agreed in May to pay its audit committee chairman a special one-time fee of $200,000 for overseeing the probe.

Joe Troy, a senior vice president at Walter, declined to say whether Mueller's demoted CFO would find a job waiting at Walter. He said he was "highly confident that (Mueller's) numbers are sound." None of Mueller's directors will be given a seat on Walter's board.

Though Walter officials expressed joy over the Mueller acquisition Monday, the companies had a less harmonious run-in two months ago.

On April 7, just days before Walter learned Mueller was for sale, Mueller sued Walter's U.S. Pipe subsidiary for allegedly infringing on its patented fire-hydrant design.

Filed in the U.S. District Court in Massachusetts, the suit requested triple damages and attorneys' fees.

Walter Industries has not filed a response. On Monday, Troy said the court case was "totally unrelated" to the acquisition and its pricing.

--Scott Barancik can be reached at barancik@sptimes.com or 727 893-8751.