Private equity firms TPG Capital and Carlyle Group (CG.O) are separately considering bids for United Technologies Corp's (UTX.N) industrial units that make pumps and compressors valued at $3.5 billion to $4 billion, according to people familiar with the matter.

The sale is one of three that the diversified U.S. manufacturer is trying to close to raise cash and avoid issuing new common shares to fund its largest-ever acquisition, the $16.5 billion purchase of Goodrich Corp (GR.N).

TPG and Carlyle are each interested in buying the businesses -- part of United Tech's Hamilton Sundstrand arm -- as a whole. This could make them serious contenders in the race, as rival company bidders are interested in buying either pumps or compressors but not necessarily both, the sources said.

When United Tech initially put the industrial units on the block in March, along with its Rocketdyne space and Clipper Windpower operations, Chief Financial Officer Greg Hayes estimated that the sale of all three units could raise about $3 billion.

"To the extent that you can have your buyers bidding up the price, it's advantageous for the company that is selling the business," said Daniel Holland, an analyst at Morningstar who follows the company. "For shareholders, it's beneficial to have that number continue to go up," he said on Tuesday.

Hartford, Connecticut-based United Tech decided to sell the three units after shareholders objected to an earlier plan to sell up to $4.6 billion in new common shares to fund the Goodrich deal.

In March the company announced a different financing plan that eliminated any direct share issuance but included $1.5 billion in convertible notes.

A substantial run-up in the bidding could allow United Tech to entirely avoid issuing convertible notes, though that is by no means a certainty, said one investor.

"You're seeing a creep-up (in bids) but not to the extent where that's feasible yet," said Oliver Pursche, president of ary Goldberg Financial Services, which holds United Tech shares. Bids would have to rise significantly for the company to avoid issuing convertible notes, he said on Tuesday.

STRATEGIC BIDDERS

FlowServe Corp (FLS.N), Dover Corp (DOV.N) and Atlas Copco AB (ATCOa.ST) are among industrial companies that have been pursuing the pump business, while Gardner Denver Inc (GDI.N) has shown interest in the compressor business, the sources said.

Reuters could not learn if any of these strategic buyers are keen to buy the entire industrial business.

Atlas Copco, for example, is a major player in compressors but believes it could encounter anti-trust issues if it were to pursue the compressor business as well, a source close to the company said.

Representatives for TPG, Carlyle and Atlas Copco declined to comment. United Tech, Dover, FlowServe and Gardner Denver had no immediate comment.

United Tech, which is open to selling these units either as a whole or in parts, has held meetings with the interested parties in recent weeks after collecting initial bids in mid-April, according to the people familiar with the matter.

The pump businesses for sale have roughly $200 million in estimated 2012 earnings before interest, tax, depreciation and amortization and may go for as much as 12 times EBITDA, or $2.4 billion, some of the sources said.

The compressor business has some $160 million in forward EBITDA and may be sold for 8-9 times EBITDA, they said.

United Tech is expected to weigh the potential valuation gains from selling pumps and compressors to different buyers, versus the simplicity of a deal in selling all the units in one transaction, the sources said.

United Tech's Hamilton Sundstrand unit makes fluid control products and pumps under the Milton Roy and Sundyne brands. It also manufactures air compressors under the Sullair brand.

Company officials have said that talks to sell Rocketdyne, which makes rocket engines used in satellite launches have now focused on one prospective buyer and that United Tech expects to have a contract to sell the unit by the end of June.

The European Union in March opened a review of the United Tech-Goodrich deal, citing concerns about the combined entities' high market share. EU antitrust regulators are expected to announce their decision by August 9.

Morningstar's Holland said he has mixed views of the merit of the sale of the industrial unit: "It was a solid business for United Technologies, it was a good performer, had high margins. It's the strongest of the three units that they're selling. So it's tough to watch that kind of profitability leave the portfolio. So it's a mixed bag."

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