Don’t count Honeywell International out of future dealmaking.
The company’s plan to spin off certain businesses creates more focus and adds long-term value for shareholders, Darius Adamczyk told CNBC in an interview. But the company is still looking to grow through acquisitions.
The CEO also said he is convinced it was the absolute right choice to retain its aerospace unit since the business has a “bullish” outlook.
“It’s always been part of our playbook to look at our portfolio,” said Adamczyk, who became CEO in April. “We assessed in terms of the very evolving and quickly changing industrial landscape… what should and should not be part of the Honeywell portfolio.”
One of the many factors the company considered during the process was whether it planned to invest in a particular segment going forward.
“Frankly, the businesses that we’re going to be spinning — and that we announced the spin of today — fell towards the bottom of that list,” the CEO said. “Given that, it naturally begs the question… should they or should they be not part of the portfolio. We came to the conclusion they should not.”
Honeywell plans to spin off businesses with about $7.5 billion in combined annual revenues, with the largest being the Homes and ADI Global Distribution business, which specializes in home heating, the ventilation and air conditioning controls and security markets, and fire protection products.
The other areas slated for spin off are the Honeywell’s Transportation Systems business, consisting of turbocharger technologies and engineering capabilities for the global automobile, truck and other vehicle markets.
However, the Morris Plains, New Jersey-based conglomerate plans to retain the Honeywell Aerospace unit, which is its largest single segment in terms of revenue. Honeywell Aerospace generated $15.2 billion in revenue last year, or about 40 percent of Honeywell’s total sales.
The aerospace business serves the commercial, defense and space aircraft markets and includes everything from aircraft engines, cockpit and cabin electronics to providing inflight connectivity solutions for airlines.
The Aerospace unit is coming off of a strong first half and an even stronger third quarter. Adamczyk attributed this performance to its ability to grow its top line and expand margins as demand for fully connected aircraft ramps up.
In April, Dan Loeb’s Third Point indicated it wanted to see Honeywell separate its aerospace unit through a spinoff and indicated such a transaction could add more than $20 billion in shareholder value.
“We are pleased that the board and management chose to conduct a thorough portfolio review and agreed that Honeywell should narrow its business focus,” Third Point said in a statement released Tuesday. “We are supportive of CEO Darius Adamczyk’s leadership and confident that his commitment to continuous portfolio optimization will further improve shareholder value.”
In 2017, there’s been a wave of merger and acquisition activity within the aerospace and defense segments and analysts have suggested the appetite will remain strong.
Recent M&A deals include defense giant Northrop Grumman buying missile maker Orbital ATK for $7.8 billion last month. Prior to that, conglomerate United Technologies announced plans to acquire Rockwell Collins, a manufacturer of avionics and aircraft interiors, for about $30 billion.
“We are absolutely committed to being an acquisitive company,” he said. “We’re very active today, and we’re going to continue to be as we move forward.”
When asked why Honeywell’s aerospace business wasn’t sold to capitalize on the dealmaking frenzy, the CEO said, “We’ve engaged all of our shareowners, and a lot of them had different thoughts and ideas. We took those into consideration as we made the recommendations today.”
In the end, the Honeywell CEO said the planned changes are “the best set of actions to maximize shareholder value.”
Besides Aerospace, three other strategic business groups Honeywell plans to keep are: Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions.
“The nice thing about this portfolio change is that we’re a much more focused company,” said Adamczyk. “We’re in six industry segments. We have four strategic business groups, and we can foresee investments in any of those four platforms.”
The company also raised its full-year earnings per share forecast by 5 cents to new range of $7.05 to $7.10. Honeywell expects to spend proceeds from the spinoffs on potential acquisitions, share repurchases as well as to extinguish debt.
Despite Tuesday’s headline-grabbing news, Honeywell stock closed the day slightly lower. Still, the company with a stock market capitalization exceeding $100 billion remains up about 23 percent so far this year.
“This is not about a one-day pop in the stock,” said Adamczyk. “This is about long-term value creation for our shareholders.”
At the same time, Adamczyk said he feels “pretty good” about Honeywell’s stock performance this year compared to some of its industrial peers or broader market stock averages such as the S&P.
On the economy and business outlook, Adamzyk also sees an upbeat picture.
“Right now we’re bullish on the outlook, both in terms of what we’re seeing from the business profile,” he said.
Specifically, he said the company is seeing “very strong” third-quarter trends, both from a revenue margin standpoint as well as improving backlog in all of Honeywell’s businesses. Also, he said the outlook remains “bullish as we head into Q4 and 2018.”