Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Honeywell International Inc. won't decide on Dan Loeb's proposed aerospace spinoff until the fall, but it's not talking like a company that wants to part with the business.

The activist investor's presence has made every presentation by the $101 billion maker of in-flight WiFi technology and airplane brakes a closely watched event. Last week, it was the company's aerospace showcase. This week, it's the Electrical Products Group conference -- an annual gathering of industrial CEOs that I promise is more exciting than it sounds. Turns out, neither event is going to yield a complete answer on whether Honeywell agrees with Loeb's Third Point LLC that an aerospace spinoff would remedy its lagging valuation.

Stay Grounded
Third Point uses the below peer group to show the value proposition for Honeywell without aerospace, but some are more profitable while others are growing faster. You could also include Johnson Controls and Eaton on this list and their valuations are less attracctive.
Source: Bloomberg
Note: Trailing 12-month operating margin is as calculated by Bloomberg for consistency purposes. Organic growth data reflects the midpoint when ranges are given.

In a slide deck accompanying Honeywell CEO Darius Adamczyk presentation at EPG on Tuesday afternoon, the company said it's still conducting its comprehensive review of Third Point's proposal and that it's "modeling various scenarios." The expected fall decision on aerospace is a while away, but for now, we can try to read between the lines a little and the signs are pointing toward a Honeywell defense of aerospace-- or a different breakup than what Loeb had envisioned. 

And that would be just fine. The case for a split is hardly as clear cut as Loeb makes it out to be and, unlike other industrial activist targets, the investor base at Honeywell isn't itching for dramatic change. Adamczyk said he agreed with Loeb that some simplification was needed, but he's still deciding what that might look like. Some other businesses that could be separated out include its vehicle turbocharger operations within aerospace or perhaps its volatile UOP petrochemical unit.

Activists at the Factory Gates
Honeywell has outperformed a basket of industrial companies over the past five years and still drew an activist
Source: Bloomberg

Tuesday's presentation includes two full slides touting the aerospace unit. There are no such slides for any of its other major divisions, which include building technologies and performance materials. I'm not sure why you include those slides if not to attempt to hammer home a response to Third Point's criticisms, particularly since Honeywell already gave a several-hours long presentation on Friday dedicated to talking up the aerospace business.

What's notable to me is the attention given to market share -- a key focus point for investors after Third Point called out the unit for its lagging organic growth. Honeywell paints a different picture, repeating many of the market-share factoids from Friday's showcase to tout its aerospace platform victories and large installed base. Comments about how Honeywell spends twice as many dollars on aerospace R&D than its closest competitor sound like a direct response to the Third Point critique that "annual margin improvement has come at the expense of investments to drive growth."

Growth Gap
Margins at both Honeywell as a whole and the aerospace division have climbed, but organic sales growth has been pressured
Source: Bloomberg

The pitch, cast in other words, is that aerospace hasn’t been held back by its position within the Honeywell empire. And as the company argued Friday, the business actually has been helped by having access to Honeywell's balance sheet, brand, digital investments and the operating philosophy that helped former CEO Dave Cote earn a reputation for consistent margin improvement. There's a whole separate slide from that earlier presentation dedicated to the joint innovation that takes place across the company.

Those aren't the kind of comments you make if you think aerospace is better off as a stand-alone business. That said, the benefit of doing these presentations ahead of a final decision is that Honeywell gets to see how well its arguments play out.

Analysts weren't overly impressed with the company's market-share grandstanding at last week's conference. In fact, their questions around this drew out an apparent acknowledgement from executives that one reason the division's longer-term organic growth target wasn't as strong was because contract wins on newer aircraft won't necessarily make up for business that's lost when older planes get retired. If Honeywell is planning on saying no to Third Point, it's going to have to come up with a plan for how to fix that and rev up growth within aerospace specifically.

While Honeywell ponders this growth conundrum and considers its "various scenarios" for the aerospace business, here's another one: sell it. A deal structured along the lines of General Electric Co.'s merger of its oil and gas business with Baker Hughes Inc. would focus the business, while still allowing Honeywell and its investors to stay involved and benefit from the greater R&D and sales power of a larger entity. GE could even be considered a partner for such a transaction, as could United Technologies Corp., Honeywell's would-be mega-target.

It's worth thinking about as Honeywell tests out Loeb's theories.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Examples include voice technology that the company has borrowed from its safety and productivity solutions business to improve maintenance on airplane parts.   

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net