Ingersoll-Rand Plc’s largest deal since 2007 may set the stage for a bigger shake-up.

The maker of refrigeration equipment, power tools and air compressors announced Monday that it was acquiring Precision Flow Systems from funds advised by BC Partners Advisors and Carlyle Group for $1.45 billion. It’s the most the company has spent on a takeover since its $10 billion acquisition of heating and air conditioner supplier Trane Inc. in 2008. The deal meets Ingersoll-Rand’s stringent acquisition criteria: About 50 percent of Precision Flow Systems’ revenue is recurring and the pump maker generates adjusted Ebitda margins in the high 20 percent range, more than Ingersoll-Rand’s own operations. The purchase price works out to a reasonable 3.6 times Precision Flow Systems’ 2018 revenue and about 11 times its expected 2019 Ebitda, net of synergies.

It’s a smart, well-priced deal, but at a time when industrial companies across the spectrum are rethinking the value of conglomerate portfolios, every acquisition must be viewed through a breakup prism. Precision Flow’s pumps are used in the water, agriculture and food-and-beverage sectors, and they complement Ingersoll-Rand’s existing Aro fluid-management business, which is housed in its industrial segment. The division is something of a smorgasbord, with Ingersoll-Rand’s Club Car golf cart and power tool businesses also falling under this general “industrial” umbrella. Ingersoll-Rand’s decision to prioritize the high-margin fluid-management operations for investment could signal a readiness to rejigger that portfolio mix. Asian buyers reportedly approached the company in the fall about acquiring its power tools business, a unit which could be worth up to $750 million in a sale.  

Ingersoll-Rand’s history shows it’s willing to go forward with a reshuffling when it makes sense. The company acquired commercial refrigeration-equipment maker Hussmann International Inc. for $1.8 billion in 2000, then later sold a majority stake to private equity firm Clayton Dubilier & Rice. It  spun off its Allegion security operations in 2013 to answer breakup calls from Nelson Peltz’s Trian Fund Management. But Trian’s original idea was that the company be split into three separate companies. Now, the time may finally be right to for the heating, air conditioning and refrigeration operations that make up the majority of Ingersoll-Rand’s revenue to be separated out from whatever remains of its industrial odds and ends.

Speculation of consolidation in the HVAC market has been heating up in the wake of United Technologies Corp.’s decision to move forward on a three-way split that would create independent companies out of its aviation businesses, Carrier climate-controls unit and Otis elevator division. Ingersoll-Rand may run into antitrust issues should it pursue a tie-up with Carrier, given the two businesses’ overlap in the transport refrigeration market. But a combination with Lennox International Inc. seems doable. Alternatively, a merger between Carrier and Johnson Controls International Plc (itself newly  focused on HVAC technologies after agreeing to sell its automotive battery business to Brookfield Asset Management Inc. for $13.2 billion) or between Carrier and Lennox would likely spark some antitrust-driven divestitures that would be prime pickings for Ingersoll-Rand.

Asked in October about the prospect of consolidation in the HVAC industry, Ingersoll-Rand CEO Mike Lamach said the company didn’t feel compelled to do a big transformative, strategic merger. “Having said that, we’ve played all the game theory that’s imaginable on us and clearly know what would make sense for us competitively and how we’d react,” he said. “If it was incredibly compelling from an investor’s point of view, we would look at that.”  

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Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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