Breakup alarm rings at $50 bln building superstore
30/05/2024 13:00
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Jeffrey Goldfarb
NEW YORK, May 29 (Reuters Breakingviews) - The cold wind
blowing through Johnson Controls International JCI.N is
not from its heavy-duty air conditioners, but instead from pushy
investors who could call time on boss George Oliver’s tenure
leading the $50 billion industrial conglomerate. The biggest
issue: a merger he helped orchestrate eight years ago has turned
out to be mostly hot air.
Oliver became chief executive soon after Johnson
Controls acquired Tyco, the company he was running, for about
$17 billion. Tax avoidance played a role, relocating the U.S.
buyer’s headquarters to lower-rate Ireland. The duo
also promised revenue uplifts from cross-selling heating and
cooling with fire sprinklers and video surveillance.
The results have been underwhelming. Since 2019, the year
after Johnson Controls sold its car-battery division for $13
billion, the remodeled company’s compound annual top-line growth
has been less than 3%, compared to a five-year average of about
7% for companies tracked by the S&P 500 Index .SPX , according
to FactSet. Its total shareholder return, including reinvested
dividends, of about 100% since Oliver became CEO broadly tracks
with fellow building-security providers. But rivals in heating,
ventilation and air conditioning Lennox International LII.N
and Trane Technologies have generated returns of 200% and 400%,
respectively, over the same span.
These disparities help explain the arrival of aggressive
fund managers Elliott Management and Soroban Capital. They have
not said what they want. Given the company’s performance,
however, it would hardly be surprising to see a push to replace
Oliver, or even for a breakup that effectively unpicks the Tyco
transaction.
For now, Oliver is sticking to his one-stop shop idea. He
wants Johnson Controls to secure higher-margin service deals for
as much as 90% of its commercial contracts, up from nearly half
now, while offloading a quarter of the company’s existing
portfolio, probably residential HVAC. The premise is to persuade
investors to regard the company more like elevator operator Otis
Worldwide OTIS.N , which trades near 17 times anticipated
EBITDA over the next year, using estimates compiled by LSEG.
Looked at another way, climate-control peers command
valuation multiples of about 18 times. Despite Johnson Controls
deriving half its earnings from commercial heating and cooling,
according to Wolfe Research analysts, it trades closer to the 13
times at which fire and security specialists trade. The
valuation gap is even more vexing given the construction frenzy
in data centers, which have substantial cooling needs.
Updated energy-efficiency rules also will prompt additional
spending on new and existing buildings.
Instead of fully capitalizing on these upswings, Oliver has
been trying to justify the lackluster Tyco deal. For all the
warning sensors Johnson Controls produces, it failed to detect
the risks of the strategy.
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CONTEXT NEWS
Activist hedge fund Elliott Management has accumulated a
stake worth more than $1 billion in Johnson Controls
International, which installs cooling and security systems in
buildings, according to a Bloomberg report on May 19, citing
unnamed sources. Fellow pushy investor Soroban Capital also has
amassed a position in the company worth more than $500 million,
Bloomberg reported a day later.
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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; Reuters Messaging:
jeffrey.goldfarb.thomsonreuters.com@reuters.net))