Activist investor Engine Capital has called on Smiths Group Plc to explore a breakup.
In a letter sent to the board on Friday, US-based Engine Capital - which holds a 2% stake in Smiths Group - said the diversified engineer should launch a strategic review.
"We believe that Smiths has significant value that is currently unrealised due to its conglomerate structure, and that it is time for the board to announce a strategic alternatives process to maximise value for shareholders," it said.
Engine Capital said a sale of the entire company or its four businesses could deliver a significant premium to the current share price.
It argued that Smiths has "persistently" traded at a "conglomerate discount" to its sum of the parts and its segment-level peers, despite strong financials and a strong operating performance.
"Smiths' undervaluation is not a new phenomenon," the investor said. "For years, the company has traded at a significant discount to its sum of the parts (SOTP) valuation. Management and the board have been unable to close this gap to Smiths' intrinsic value and its segment-level peers despite producing strong financials and operating performance - leading us to conclude that structural issues have held the company back from being fairly valued in the public market.
"With several recent breakups that have created tremendous value for investors in the industrial sector, we see a significant and timely opportunity for the board to unlock meaningful value for shareholders by optimising Smiths' corporate structure."
In the letter, Engine Capital also warned the board and new chief executive Roland Carter against pursuing material acquisitions while maintaining its conglomerate structure.
"To acquire a high-quality company of scale in any of Smiths' end markets will likely require Smiths to pay a multiple well in excess of where it currently trades, which adds significant risk and will most likely result in value destruction as Smiths' higher cost of capital within the conglomerate structure is applied to the target's assets after the acquisition," it said.
"Two recent examples of this dynamic in Smiths' end markets are kSARIA (acquired by ITT) and CIT (acquired by Amphenol Corporation). Both target companies transacted at EBITDA multiples in the 12x-14x EBITDA range and are representative of what Smiths would likely have to pay for high quality at scale businesses."
Engine Capital said that paying such multiples when Smiths trades for a sub-10x multiple "would be a disaster for shareholders" and will not help re-rate the shares.
"While we have no issues with the board approving small tuck-in transactions at low multiples, as it has done recently, we strongly caution the board against pursuing medium or large transactions that will most likely require paying a higher multiple," it said.