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Investing.com -- Smiths Group (LON:SMIN), the UK-based engineering conglomerate, on Friday announced plans to divest its baggage-screening business, Smiths Detection, as part of a broader restructuring effort aimed at increasing shareholder value.
The move comes amid pressure to address what the company acknowledges as a "persistent discount to the significant value embedded within the Group."
As part of the overhaul, Smiths will focus on its industrial technology units, John Crane and Flex-Tek, which provide flow and heat management solutions for the energy and industrial sectors.
“A Smiths Group (OTC:SMGZY) break up has been long hoped for, but is a real surprise,” said analysts at RBC Capital Markets in a note.
The company will also sell its Smiths Interconnect business, which supplies electronic components and connectivity solutions.
Smiths aims to complete the sale of Smiths Interconnect by the end of 2025 and will then proceed with the separation of Smiths Detection, either through a sale or a UK demerger.
The restructuring plan follows a period of sustained financial performance, with the company reporting 7% annual organic revenue growth from 2021 to 2024 and a rise in operating margins to 16.8%.
Over the past three years, Smiths has returned more than £1.2 billion to shareholders through dividends and buybacks.
The company has now expanded its share buyback programme from £150 million to £500 million, with an additional commitment to return a large portion of proceeds from asset sales.
The decision to break up the company reflects a growing trend among industrial conglomerates to streamline operations in response to investor pressure.
Smiths Detection, which specializes in airport security screening equipment, has benefited from increased investment in aviation security and infrastructure upgrades.
However, the company’s board determined that spinning off the unit would unlock greater value for shareholders.
Roland Carter, chief executive at Smiths Group in a statement said that framed the restructuring as a means to create a more focused business with "significant potential for future growth and value creation."
He added that the company would carry out the separations "in a manner that is respectful of our employees, our customers and our suppliers."
A new board committee has been formed to oversee the restructuring, comprising chairman Steve Williams and independent non-executive directors with experience in capital markets and mergers and acquisitions.
The company has pledged to execute the plan "at pace," signaling a swift timeline for the anticipated separations.
The announcement comes as Smiths Group continues to manage the fallout from a recent cyber incident that affected its internal enterprise systems.
The company said it had made "good progress" in recovering operations and that its full-year financial guidance remains unchanged.
“Investors should see this as a positive step, although with a group EV/EBITA at only ~10% discount to John Crane peer Rotork (LON:ROR) on our estimates, the actual further valuation upside may not be as dramatic as some might anticipate,” RBC added.