Elliott puts too many eggs in Honeywell’s basket

Ingersoll Rand

14/11/2024 13:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
    By Jeffrey Goldfarb
       NEW YORK, Nov 13 (Reuters Breakingviews) - Some ideas
are rejected so often that it can be hard to revisit them with
an open mind. Breaking up Honeywell International  HON.O  may be
one such example. Elliott Investment Management is the latest
proponent of cleaving the industrial conglomerate to wring
additional value from its complex set of businesses, but the
pushy hedge fund’s overconfidence risks yet another dismissal.
    There is no mistaking Elliott’s conviction. Its $5 billion
stake in Honeywell, disclosed in a letter to the board on
Tuesday, is the biggest single investment in the money manager’s
47-year history, and one of the heftiest activist positions
taken by any fund ever. If nothing else, that alone should get
the attention of Chairman and Chief Executive Vimal Kapur, as
well as other shareholders in the $150 billion company.
    The proposal is not original, as Elliott concedes. Dan
Loeb’s Third Point also pushed to split Honeywell’s hulking
aerospace division in 2017, only to be placated by two smaller
spinoffs. The board also has had plenty of time to consider the
plan, especially as carve-ups at other creaking empires
played out at General Electric, DuPont and beyond over the
years. Instead, Kapur is trying to reverse industry-lagging
shareholder returns by striking smaller deals to leverage
broader trends in automation, aviation and the energy
transition.
    Making Honeywell two distinct companies — aircraft parts and
systems in one and industrial products and services ranging from
emissions monitoring to heat pumps in the other — has merit.
Both are sizable enough to successfully stand alone. Right now,
the combined enterprise fetches a valuation of about 14 times
expected 2026 EBITDA, according to estimates gathered by Visible
Alpha. A basket of peers in aerospace, building services,
process automation and energy technology, including TransDigm
 TDG.N  and Illinois Tool Works  ITW.N , trade on average at
about 16 times. The numbers imply a theoretical 15% uplift in
market value, Breakingviews calculates.
    Elliott sees more to gain. Partly by subtracting capital
expenditures from EBITDA to more cleanly compare free cash
flows, the firm reckons a simplified Honeywell with less
distracted management teams would gain at least 50%, and maybe
75%, in value in two years. Moreover, Elliott contends that many
investors underestimated returns from demergers at GE, United
Technologies and Ingersoll Rand  IR.N . Its cherry-picked
examples, however, overlook disappointing attempts like those at
DuPont or AT&T  T.N , which created less value. The danger with
such bravado, when the result could be distinctly pedestrian, is
that it casts doubt on the underlying proposition.

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    CONTEXT NEWS
    Activist hedge fund manager Elliott Investment Management on
Nov. 12 called for Honeywell International to split itself into
two companies, arguing that there is scope for a 50% to 75%
valuation uplift over the next two years by doing so.
    In a letter to the company, Elliott said it had accumulated
a $5 billion stake and wants the industrial conglomerate to
separate its aerospace business from divisions selling products
and services in commercial buildings, energy technology and
process automation.
    Honeywell said it looks forward to engaging with Elliott,
adding that it had no prior knowledge of its investment.
    Dan Loeb’s Third Point in April 2017 urged Honeywell to spin
off its aerospace division. In October 2017, the company said it
would spin off two other, smaller businesses.

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Honeywell's conglomerate power has waned    https://reut.rs/4hOYTiI
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 (Editing by Jonathan Guilford and Pranav Kiran)
 ((For previous columns by the author, Reuters customers can
click on  GOLDFARB/ 
jeffrey.goldfarb@thomsonreuters.com))