WASHINGTON — Honeywell is spinning off two of its commercial business units, keeping its aerospace and defense business and priming the company for additional mergers and acquisition activities, the company announced Tuesday.
After conducting a portfolio review, Honeywell has decided to turn its homes portfolio and ADI global distribution business — which manufactures products like thermostats and security products — and its Transportation Systems business, which specializes in automotive engines, into two standalone, publicly traded companies.
Earlier this year, investment firm Third Point LLC urged Honeywell to spin off its aerospace and defense business, which has been hit with falling sales. Although Honeywell President and CEO Darius Adamczyk said the company did consider that option, it ultimately decided to double down on that business unit and break off two of its wholly commercial portfolios.
“Today’s announcement marks the culmination of a rigorous portfolio review involving a detailed assessment of every Honeywell business. As part of that review, we analyzed numerous criteria, including growth outlook, financial performance, market dynamics, potential for disruption and, most importantly, assessment of fit as a Honeywell business,” Adamczyk said.
During a call with investors, he added that the transition of homes and transportation to standalone companies would leave all of the company’s business areas with more potential for mergers and acquisitions.
“The punchline for me is [that] we’re going to be very active in the M&A arena,” he said. “In terms of prioritization, I think now, given these two spins and given the optimized capital structure, I’m very excited about investing in any four of the [business segments].”
Over the past six weeks, the defense and aerospace sector has seen a flurry of acquisition activity, which was kick-started when United Technologies Corp. announced in early September its plan to purchase Rockwell Collins. Both companies are rivals to Honeywell in different portfolios, and Honeywell itself made a hostile takeover attempt for UTC last year.
That acquisition announcement was followed by similar ones ‘with Boeing’s plans to buy Aurora Flight Sciences and Northrop Grumman’s plans to buy Orbital ATK.
Should Honeywell have opted to sell its aerospace and defense segment, it could have possibly found a buyer in General Electric, which sought to purchase Honeywell more than 15 years ago but was blocked by European regulators, said Richard Aboulafia, an aerospace analyst with the Teal Group.
Aboulafia believes those entities would be more permissive of a smaller deal for Honeywell’s aerospace business, which would have positioned both GE Aviation and UTC as huge aerospace parts empires. But with Honeywell hanging on to its aerospace products, it’s unlikely it will be able to do such a large-scale merger with another major company, though Aboulafia said Honeywell could acquire smaller, lesser-known firms.
“Industry logic certainly seemed to be arguing in favor of an aerospace spinoff,” he said. “That aerospace property would probably attract a nice price, and it’s hard to see how it fits in terribly well with the rest of its businesses.”
“But they might have their reasons,” he added. “One of them is possibly aftermarket revenue. It’s tough to replace that profitability stream. Another is they might have thought that the likely buyers would have had a hard time passing regulatory hurdles. That’s conceivable. I don’t know for sure that’s true, but they might have believed it,” he said. “Most likely they just saw it as core to who they were, part of their DNA.”