Activist investor Third Point LLC is pressuring Honeywell International Inc. to spin off its aerospace division, seeking to break off the conglomerate's biggest business just a few weeks after Honeywell switched leaders.
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The aerospace unit has been a drag on the company's performance and separating it "would result in a sustained increase in shareholder value in excess of $20 billion," Daniel Loeb's Third Point wrote in a letter to its investors. The activist argued organic growth at the unit, which produces engines for small aircraft made by Bombardier, Textron and others, has lagged behind its peers.
Mr. Loeb has been in discussions with Honeywell's management in recent weeks and the discussions have so far been cordial, people familiar with the matter said.
Honeywell responded Thursday that it is open to shareholder ideas and it "would take the time necessary to ensure a comprehensive, informed and objective review of the potential separation of the Aerospace business."
The company, which has a market value of roughly $100 billion, makes everything from aircraft landing gears to home thermostats. The aerospace business accounts for about 37.5%, or $39.3 billion, of its annual sales. The segment's revenue dropped 3% in 2016 and 4.3% in the latest quarter.
Shares of Honeywell jumped 3.5% on the news Thursday, to $134.75.
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Third Point's approach comes a few weeks after Darius Adamczyk took over as Honeywell's CEO from longtime leader David Cote, who remains the company's chairman. The 50-year-old engineer-turned-executive joined the company eight years ago through an acquisition and climbed the ranks.
Last year, the Morris Plains, N.J., company disappointed investors by cutting its sales projections for 2016 and then lowering its 2017 sales and profit targets. Last week, it reported higher quarterly profits despite a dip in revenue.
After taking charge, Mr. Adamczyk said Honeywell still had an appetite for more acquisitions. "We do want to be active and secure the right deals, but we also want to continue to be prudent buyers, not overspend, " he told investors last week.
Third Point praised Honeywell's management, highlighting a 11.5% annualized return during Mr. Cote's recently ended tenure, compared with a 7% return from the S&P 500 over the same period. Despite that performance, it said "the stock trades at a substantial discount to its industrial peer group."
The activist, which has pushed a split at Dow Chemical Co. and was once famous for scathing letters but has in recent years tempered its missives, said a breakup could increase management's focus on industrial businesses that it expects to grow with more automation and the expansion of the Internet of Things. At the same time, it would free up management in the aerospace. business to improve its operations by tying management compensation to its specific needs and using its capital in a more efficient manner.
Honeywell defended its conglomerate structure and its recent financial performance. The company said it is "focused on effectively deploying capital to generate consistently outstanding returns. We have a strong portfolio of businesses with great positions in growing industries. Aerospace is no exception."
Mr. Cote revived the company's fortunes during his 15-year tenure, coming on board after Honeywell was reeling from a failed merger with General Electric Co. He expanded the business with a series of midsize acquisitions, and then attempted a megadeal last year: a $90 billion bid for rival United Technologies Corp. He was rebuffed and dropped the deal, which would have merged two major aerospace suppliers.
While activists have often looked to break up such companies, some had previously applauded Mr. Cote and his success. Nelson Peltz, who is known as a conglomerate-buster, once said Honeywell was one of the few conglomerates to earn the right to stay together. It passed his test of the underlying businesses each performing well on their own, he said.
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(END) Dow Jones Newswires
April 27, 2017 19:18 ET (23:18 GMT)