For Oshkosh, The Best For Defense May Be A Good Spinoff

Two years after successfully fending off legendary activist Carl Icahn and his plan to break up the company, some think that Oshkosh Corp(OSK) management may be planning a spinoff of its own.  Maureen Farrell of the Wall Street Journal reports on a recent note by CreditSights analyst Jeff Wichmann.  Wichmann suggested that Oshkosh may be considering a spinoff of its defense unit next year.

Mr. Wichmann wrote in a research report that Oshkosh might consider spinning off its shrinking defense unit if it fails to win a key Pentagon contract next year.

Oshkosh, he said, recently took steps to make it easier to execute a spinoff of its defense unit by rearranging some of its assets into an operating subsidiary called Oshkosh Defense LLC.

Oshkosh will find out in July 2015 whether or not it lands a contract with the U.S. military to build out a line of so-called joint light tactical vehicles, which are set to become the successor to the Humvee for the U.S. Army and Marine Corps.

A spinoff of its defense unit, could provide Oshkosh with the cash to do deals, Mr. Wichmann said. Oshkosh’s CEO told investors and analysts in March that the company would look at deals that would help Oshkosh diversify, though they would probably be smaller than its 2006 $3 billion acquisition of JLG Industries Inc., which makes construction equipment.

John Daggett, a spokesperson for Oshkosh declined to comment, citing the company’s policy on commenting on M&A activity. In an email, Mr. Daggett wrote “Oshkosh Defense is a very important part of the Oshkosh Corporation. We stand ready to build tactical wheeled vehicles for our existing contracts, our potential new domestic and international contracts and in anticipation of winning the JLTV contract.”

While most of Oshkosh’s sectors have seen sales growth, Oshkosh’s defense segment has been a drag, as the U.S. military cut back its ground operations around the world. Analysts expect this segment to continue weighing on Oshkosh’s overall performance.

If Oshkosh were to spin off its defense business, it would be following in the footsteps of several other companies that have made similar moves in recent years, including Alliant Techsystems'(ATK) upcoming spinoff and merger with Orbital Sciences(ORB), and Exelis(XLS) recent spinoff of Vectrus(VEC). We tend to agree with those who view this as unlikely, particularly given that this management successfully opposed Icahn regarding a spinoff, but, of course, circumstances and minds can change with the passing of time.

Disclosure: The author holds no position in any stock mentioned