Honeywell to Spin Off Units Into Two Stand-Alone Companies -- 2nd Update

By Thomas Gryta and Cara Lombardo Features Dow Jones Newswires

Honeywell International Inc. plans to spin off its home and transportation businesses into two new separate companies by the end of next year, a move that gained approval from activist investor Third Point.

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The moves are the first efforts to streamline the conglomerate under new Chief Executive Darius Adamczyk, who took the reins in late March. He launched a months long portfolio review looking at all aspects of the company, including whether it should remain whole. The effort received an extra push in late April when Third Point asked Honeywell to spin off its aerospace unit, an idea it ultimately rejected.

The Morris Plains, N.J., company said Tuesday that the new homes and ADI Global Distribution business, which will include residential thermostats and security and fire-protection products, would generate annual revenue of $4.5 billion. The transportation business, a portion of the company's current aerospace unit that primarily serves the auto industry, would focus on turbocharger technologies and generate annual revenue of $3 billion.

The entire company generated $39 billion of revenue last year.

In a call with analysts Tuesday, Mr. Adamczyk said Honeywell "will focus on fewer markets and verticals," shifting away from consumer and distribution segments. "My goal was to scrutinize and assess each business unit to derive a portfolio best capable of maximizing shareholder value over the long term," he said.

Third Point said it was pleased with Honeywell's review and narrowed focus. "We are supportive of CEO Darius Adamczyk's leadership and confident that his commitment to continuous portfolio optimization will further improve shareholder value," the activist investor said.

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Honeywell had a string of success under previous CEO Dave Cote, who turned the company around and boosted its market value fivefold during his 14-year tenure. His expansion through acquisitions produced a conglomerate that makes everything from jet engines to thermostats to rubber boots. Mr. Cote remains Honeywell's chairman through April.

Mr. Adamczyk has stressed that the conglomerate structure has worked well for Honeywell, even as companies are under pressure to focus on core competencies.

Also helping the resistance to breaking up the company: Honeywell shares are up 24% so far this year. They were up less than 0.1% Tuesday at $143.73.

In retaining the aerospace business, the company highlighted the attraction of the sector in general and the fact that it benefits from other Honeywell operations. It also brings a "significant proportion of U.S.-based cash flows" for Honeywell, which has much of its cash overseas.

Nicholas Heymann, an analyst with William Blair & Co., said the remaining portfolio is "relatively high-growth businesses with six key end-markets" that will use Honeywell's customers to produce more organic revenue. Deutsche Bank analyst John Inch said the moves put Honeywell on "an upward growth trajectory from a smaller revenue base" and leave it with billions in capital to fund future expansion.

The company said it could spend up to $10 billion in overseas acquisitions in 2018, while using another $5 billion for U.S. deals, share buybacks and debt repayment. If U.S. tax reform is passed, the company expects it could use the entire $15 billion anywhere.

Honeywell on Tuesday raised the low end of its full year earnings per share guidance by 5 cents to a range of $7.05 to $7.10. The company, which is scheduled to report its third-quarter financial results Oct. 20, said it expects earnings of $1.75 a share on sales of $10.1 billion in its latest quarter, up 3% from a year ago.

Honeywell expects the separations, which won't require a shareholder vote, to be complete by the end of 2018 and be tax-free to its shareholders. The new homes business will have about 13,000 employees, while the transportation business will have about 6,500.

Honeywell on Tuesday said Gary Michel will take over as president and CEO of its home and building technologies strategic business group. Mr. Michel, who previously was a president at Ingersoll-Rand PLC, will report to Mr. Adamczyk.

He replaces Terrence Hahn, who is moving to a leadership role to help prepare the homes and ADI business to be spun off.

David Benoit contributed to this article

Write to Thomas Gryta at thomas.gryta@wsj.com and Cara Lombardo at cara.lombardo@wsj.com

(END) Dow Jones Newswires

October 10, 2017 12:47 ET (16:47 GMT)