Third Point Calls for Honeywell to Spin Off Aerospace Unit--Update
April 27 2017 - 7:33PM
Dow Jones News
By David Benoit and Thomas Gryta
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.
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.
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.
Write to David Benoit at david.benoit@wsj.com and Thomas Gryta
at thomas.gryta@wsj.com
(END) Dow Jones Newswires
April 27, 2017 19:18 ET (23:18 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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