ITW, Relational set pact amid pressure to pare down

GLENVIEW — Illinois Tool Works Inc. and Relational Investors LLC have entered into an agreement that gives Relational an option to appoint David H. Batchelder, its principal and co-founder, to ITW’s board of directors.

Relational began investing in ITW shares in mid-2011 and owns approximately 2.1 percent of ITW’s common stock, as of the last quarter. The agreement is detailed in an exhibit to the Form 8-K that the company filed with the Securities and Exchange Commission.

The agreement provides Relational with an option to appoint Batchelder to the ITW board of directors at Relational’s request any time after ITW’s 2012 stockholders meeting, but before the 60th day prior to ITW’s 2013 stockholders meeting. If Batchelder is appointed, ITW agrees to renominate him at the 2013 meeting for a one-year term. During that same time, Relational has agreed to support the company’s recommendations for nominees to the board.

“ITW and Relational have engaged in a series of productive discussions about our business and growth prospects,” said David B. Speer, ITW’s chairman and chief executive officer. “We welcome open dialogue with and input from our shareholders and are pleased to have reached this agreement with Relational. Our board and management team remain committed to generating profitable growth and delivering strong returns and we look forward to continuing to enhance value for all of our shareholders.”

Relational Investors LLC Founder and principal Ralph Whitworth is urging the company to pare business units and cut purchasing costs, a person familiar with the talks told Bloomberg News.

The fund will push for trimming Illinois Tool’s eight segments to the four or five most profitable ones, said the person, who asked not to be identified because the discussions are private. Any future acquisitions would be focused on the remaining businesses, the person said yesterday.

Anna Cordasco, a spokeswoman for San Diego-based Relational, declined to comment about what the fund may do at the company. Illinois Tool’s Alison Donnelly declined to comment on any strategy change being urged by Relational.

The fund, which oversees $6.5 billion, has pressed for changes at companies such as industrial conglomerate ITT Corp. and defense contractor L-3 Communications Holdings Inc. Whitworth and Batchelder, who both worked for billionaire oilman T. Boone Pickens, founded the fund in 1996 with $200 million from the California Public Employees’ Retirement System.

At Illinois Tool, Relational also wants the company to centralize logistics and the buying of materials, taking advantage of its size to cut costs, the person said. Sales for 2011 probably totaled $17.9 billion, based on results for the first nine months and analysts’ fourth-quarter estimates.

Illinois Tool’s shares have fallen 11 percent in the past year, worse than the 0.4 percent gain for the Standard & Poor’s 500 Index and the 0.5 percent drop in the S&P 500 Industrials Index.

The company could expand its 10-member board, said Donnelly, the spokeswoman.

ŸBloomberg News contributed to this report