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Honeywell Spins off Two Units, Looks for M&A to Keep Aerospace

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Honeywell International Inc said on October 10, 2017, that it will pare its focus to four business lines, including aerospace, and spin off two businesses with $7.5 billion in revenue to help fund acquisitions.

The reorganization, which reduces revenue by about 18 percent, will simplify Honeywell’s broad portfolio, boost growth and give shareholders a tax-free benefit from the new companies, Honeywell Chief Executive Officer Darius Adamczyk said on a conference call on October 10, 2017.

It also gives the diversified manufacturer scope to change its remaining portfolio along the lines sought by hedge fund Third Point Capital, which agitated for a spin-off of aerospace. Third Point said on the same day that it was pleased with the changes and backed Adamczyk’s leadership, though it wants him to keep improving the portfolio.

Adamczyk hinted at more to come, saying the two new businesses “can grow at an accelerated rate.”

The remaining businesses – aerospace, commercial building products, performance materials and safety products – are candidates for more acquisitions, he added.

“I‘m very excited about M&A in all four of our businesses. And I think these two spins … give me a lot of different levers to invest our M&A dollars.”

Analysts praised the moves but said Honeywell had more changes to make and warned that aerospace, with products ranging from jet engines to airplane WiFi systems, may need to merge to gain the size to compete with larger rivals.

A spin-off or merger with General Electric Co’s aerospace unit would make Honeywell a stronger competitor to United Technologies and a “more powerful supplier to Boeing Co and Airbus SE,” Scott Davis, an analyst at Melius Research, wrote in a note. “That’s a deal worth thinking about.”

Adamczyk played down such speculation in a newswire interview. “The way we compete in aerospace is not through scale,” he said. “We are going to compete through technology differentiation.”

Though his comments pointed away from a big deal, Honeywell sought to gain size last year with a $90.7-billion bid for United Technologies Corp under prior CEO David Cote. Industry experts say Honeywell’s poor record on aerospace parts quality and delivery could hamper its ability to win new orders.

Honeywell shares ended the day down 0.2 percent in New York trading, after falling 2.3 percent initially.

Revamped Portfolio

Adamczyk, like his peers at other industrial conglomerates, has been under pressure to reorder a portfolio of disparate businesses that includes automotive turbochargers, burglar alarms and Xtratuf boots popular in Alaska’s fishing industry.

Third Point had argued since April that a spin-off of aerospace, which accounted for about 38 percent of revenue in 2016, could generate $20 billion in shareholder value.

But Adamczyk took a different route, splitting off the home and ADI global distribution businesses, wholesale distributors of security, fire and environmental systems for homes and commercial buildings, into a public company that will absorb some of $554 million in environmental liabilities.

Honeywell will also spin off a transportation business that makes automotive turbochargers into a second company that will absorb some of $1.54 billion in old asbestos liabilities. The amounts will be determined later, Adamczyk said.

The auto parts move follows other companies, including auto supplier Delphi Automotive Plc, that are shedding technology tied to the internal combustion engine as regulators around the world crack down on emissions and talk of mandating a switch to battery-electric vehicles over the next two decades.

With about $16 billion in debt, or 2.5 times operating earnings, Honeywell has limited scope for additional borrowing, said Dave Berge, an analyst at Moody’s Investors Service.

Honeywell expects to receive about $3 billion in dividends from the spin-offs, adding to its nearly $10 billion in cash.

That “positions the company to do meaningful acquisitions,” said Harsh Acharya, an analyst at Diamond Hill Capital Management Inc in Ohio.

The spin-offs are not due to close until the end of 2018, giving time to work out details – and, as Adamczyk noted, to consider other offers.

“We are leaning towards the spin route,” he told media. “But if we get compelling offers, we would, of course, consider them.”

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