Analysis: Elliott's $5 billion Honeywell gambit: would a split pay off?

Otis Worldwide

15/11/2024 16:18

By Utkarsh Shetti and Nathan Gomes
       Nov 15 (Reuters) - Diversified conglomerates were long a
fixture of the U.S. stock market landscape, with the Dow
industrials bolstered by big names such as 3M, General Electric,
United Technologies and others. But many of those companies have
since broken apart, and shares of their spinoffs have surged.
    Activist Elliott Investment is arguing that Honeywell
 HON.O  should be next on the list. Post-breakup shares of
companies like General Electric indeed have thrived, as firms
elect to separate disparate units into smaller companies.
    "Breakups of conglomerates in this space have typically
created significant value," said Jake Levinson, analyst at
Melius Research.
    Elliott's $5 billion-plus stake in Honeywell is one of its
largest single investments; it argues that shares could rise
between 51% and 75% over the next two years with a breakup, a
prediction some analysts felt was overly ambitious. 
    General Electric  GE.N , a venerated 132-year-old
conglomerate that was once America's most valuable company,
completed a three-way split in April. Since then, GE shares -
which now only reflect the aerospace unit - rose about 35%; the
broad-market S&P 500 has gained 14.3% in that time. 
    United Technologies, which included Otis Corp  OTIS.N  and
Carrier Global  CARR.N , faced pressure to dismantle its
structure from activist hedge funds.
        Since completing the breakup in April 2020, shares of
Carrier have more than quadrupled, while Otis has more than
doubled - compared with an about 80% rise in Honeywell in that
period.
    Honeywell's top boss Vimal Kapur is trying to turn around
the company with smaller deals to build on its automation,
aviation and energy businesses. However, the stock is still
lagging its peers, with a 28% gain over the last five years,
compared with the S&P 500's about 91% rise.     
        When contacted, Honeywell referred to its statement on
Tuesday that said it was looking forward to engaging with
Elliott. 
  
    A group of 12 industrial spin-offs gained about 50% in the
year following their spinoffs, outperforming the Industrial
Select Sector SPDR Fund  XLI.P  by nearly 27%, according to RBC
Capital Markets data.
    More broadly, the evidence is mixed. Invesco's Spin-off ETF
 CSD.P , a fund that tracks S&P 500 companies that have spun out
from larger corporations, has trailed the market over the last
decade. The ETF has risen nearly 90%, while the broader market
has nearly tripled.
      
THE HONEYWELL QUESTION
    In Elliott's letter on Tuesday, it argued that Honeywell is
weighed down by uneven execution and inconsistent financial
results owing to its conglomerate structure and called for the
company to "embrace simplification."
    Weakness in one segment can dent the profits of a larger
company. Honeywell has been grappling with sparse demand in its
industrial automation business, offsetting growth in its
aerospace segment. 
    "Honeywell appears to be overly diversified. It is difficult
to argue there are sufficient synergies between cutting-edge
aerospace research and residential fire safety products to
justify keeping them under one company," said David Halliday,
associate professor of strategic management at George Washington
University. 
    Halliday, however, said that he did not share Elliott's
optimism on projected valuations, arguing that efficiency gains
from a spinoff would take years to materialize. 
    "Honeywell is not exactly undervalued by market standards.
Honeywell's current P/E ratio of 27 is a bit shy of the market
average of 30," Halliday added.  
    In 2017, Honeywell managed to shrug off Daniel Loeb's Third
Point, which urged it to spin off its aerospace division, though
it did spin off two smaller businesses. 
    Honeywell is currently worth about $150 billion, but it
could be worth as much as $300 per share "conservatively" by
2026 in the event of a spinoff, said Tony Bancroft, portfolio
manager at Gabelli Funds, which holds Honeywell's shares. That
equation would give it a valuation of about $195 billion.
    "Both the automation and aerospace industries have huge
addressable markets and it's now up to Honeywell management to
decide how much they value Elliot Management's advice and
whether or not it's best to attack the opportunity as one
company, or two," said Paul Marino of Themes ETFs, an
asset-management firm.
    

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Price performance of spin-off ETF vs S&P 500 over the past
decade    https://reut.rs/4hP7GRH
Shares of Honeywell since 2022    https://reut.rs/48OdmYg
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Utkarsh Shetti, Nathan Gomes and Arasu Kannagi
Basil in Bengaluru; Additional reporting by Aishwarya Jain;
Editing by Anil D'Silva)
 ((UtkarshUmesh.Shetti@thomsonreuters.com;))