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Walter to spin off water units

The company says a hedge fund investor's deadline was not a factor in deciding to split off its water product businesses.

By STEVE HUETTEL
Published October 22, 2005

TAMPA - Walter Industries unveiled a plan Friday to break up its diverse business units, days after a major hedge fund investor gave the company a quick deadline to make the move.

Walter will spin off its water product subsidiaries, valve and hydrant maker Mueller Water Products and U.S. Pipe, which makes pipe used in municipal water systems, likely in the first quarter of next year.

Some shares in the new company will be sold in an initial public offering, with the rest distributed tax-free to Walter shareholders. The spinoff would take away a large chunk of Walter's revenues, leaving Walter with its coal mining and home building divisions. The water product business, including the company's recent acquisition of Mueller, accounts for more than half of Walter's 10,000-plus employees.

The split will increase Walter's value by giving investors a choice between two more focused companies, one in water infrastructure and one predominantly in coal mining, Walter officials said.

Walter didn't cite pressure from hedge funds in the breakup. The board of directors' decision resulted from "a program of transformation and value creation that has been going on for some time," said senior vice president Joseph Troy.

But hedge fund Pirate Capital LLC of Norwalk, Conn., disclosed Tuesday that representatives laid out a similar breakup plan to Walter one day before and gave the board until Oct. 31 to adopt it.

If the board refused, the hedge fund would lead a shareholder revolt to replace most of the directors with representatives from Pirate and people with "significant backgrounds" in coal and industrial companies, reads a filing with the Securities and Exchange Commission.

Pirate also disclosed buying more Walter shares that raised its stake to 8.2 percent. A fund official declined comment Friday. But Troy and the president of another hedge fund invested in Walter said they think Pirate is the company's largest shareholder.

Hedge funds often are more active than traditional mutual funds in trying to leverage changes in public companies whose stock they hold. They often cater to the rich, requiring large minimum investments, and are characterized by a lack of public disclosure.

The funds profit by using unconventional techniques, such as short-selling or betting on falling markets, to make a profit during market downturns.

In May, Pirate threatened to challenge Walter's board if the company didn't split up its coal, home building and iron-pipe units.

The coal mines would fetch $50 a share on Wall Street if they weren't being dragged down by the other units, the hedge fund said, and all three units were worth $65 a share if separated.

Walter's announcement Friday drew praise from David Tepper, president of Appaloosa Management LP, a hedge fund in Chatham, N.J., that was Walter's top shareholder earlier this year.

"The board is doing the right thing at the right time," he said. Any move to oust board members is a dead issue, Tepper said.

Troy said the board's decision was "absolutely not" a reaction to Pirate's ultimatum. He acknowledged that Walter's plan revealed Friday looked a lot like the outline the hedge fund filed with the SEC three days earlier.

""Their plan looks a lot like our plan," Troy said. "It's not ours that looks like theirs."

Regardless, Wall Street liked it. Walter shares closed Friday at $47.39, up $2.30 or 5.1 percent in heavy trading.

Walter had been trying to sell the volatile coal mining business for years but reversed course and committed $135-million to expanding output as coal prices soared. Its share price tripled in 2004, outperforming all other Tampa Bay area stocks.

Steve Huettel can be reached at huettel@sptimes.com or 813 226-3384.

[Last modified October 22, 2005, 01:13:18]