Honeywell CEO Leaps Toward M&A Goal on $5.1 Billion Elster Deal

Honeywell International Inc. suggested earlier this year that the company might reach its goal of $10 billion in takeovers by the end of 2018 with one blockbuster transaction.

On Tuesday, it got halfway there.

Honeywell agreed to buy Melrose Industries Plc’s Elster unit for 3.3 billion pounds ($5.1 billion), adding a maker of gas, electric and water meters. The purchase will broaden Honeywell’s product lineup and create “a new platform for acquisition targets,” Chief Executive Officer Dave Cote said.

Snagging Elster follows up on the interest Cote expressed in May in moving into water and health care as he pursues the mergers-and-acquisitions mark set in 2014. Honeywell, which operates in the energy, automation, aerospace and chemicals industries, wants to deploy a growing cash hoard while shareholders push for stock repurchases and dividends.

“This announcement makes good on CEO Dave Cote’s repeated assurances for more aggressive capital allocation in M&A,” Deane Dray, an analyst with RBC Capital Markets LLC, said in a note to investors. “We note that Honeywell has sidelined buybacks as a second priority versus M&A, and this milestone deal looks to be worth the wait.”

Honeywell rose 2.5 percent to $104.20 at the close in New York, the most in six months. London-based Melrose gained 9.6 percent to 278.90 pence, the biggest one-day jump since November 2010. The transaction more than doubled the $2.3 billion that the investment firm paid for Elster in 2012.

New Platform

Elster, a maker of gas, electric and water meters, will extend Honeywell’s equipment offerings and create “a new platform for acquisition targets,” Cote said Tuesday. Honeywell reaffirmed its 2015 profit forecast and predicted the deal would close in 2016’s first quarter.

Honeywell, which operates in the energy, automation, aerospace and chemicals industries, wants to deploy a growing cash hoard while shareholders push for buybacks and dividends.

“The Elster acquisition proves that we are staying true to our disciplined M&A approach and integration processes,” Cote said in a statement. “It’s a model that has worked very well for us.”

Elster employs about 6,800 people with operations in the U.S., Germany, Britain and Slovakia, according to the statement from Morris Township, New Jersey-based Honeywell.

Cote, 63, who has been CEO since 2002, has been gradually raising his sights on the size of prospective deals since saying in 2013 that he preferred to stay in the $1 billion-or-less range. In March, Roger Fradin, the vice chairman in charge of acquisitions, hinted that Honeywell might reach the target for $10 billion by the end of 2018 “in one shot.”

Largest Deal

The purchase is Honeywell’s largest since the transaction that created the business, AlliedSignal Inc.’s 1999 acquisition of Honeywell Inc. for about $16.1 billion, according to data compiled by Bloomberg. The combined company took the Honeywell name.

The price is about 12.6 times Elster’s estimated 2015 earnings before interest, taxes, depreciation, and amortization, according to Honeywell.

It’s a “pricey platform move,” Gautam Khanna, a Cowen & Co. analyst, said in a note to investors.

Elster’s products include equipment to measure and regulate the flow of natural gas, and gather and evaluate data on it. The gear is used in both production and distribution of the fuel.

“Buying this business fits with the company’s end market,” Bloomberg Intelligence analyst Karen Ubelhart said in an interview. “It has the technology component, the software component, and it’s on the higher growth end of the industrials business.”

Deal Advisers

Melrose, which has a market value of 2.5 billion pounds, said it will use the proceeds to return more than 2 billion pounds to shareholders and reduce debt. Melrose was advised by Rothschild, as well as JPMorgan Chase & Co.

Honeywell’s biggest line of business is aerospace, followed by automation and control equipment and performance materials, according to data compiled by Bloomberg.

In March, the company said it had made 80 acquisitions under Cote, averaging $170 million. Honeywell expanded into new product groups such as gas detection and safety equipment that served similar construction customers, the executive said.

Cote has said he isn’t a big fan of repurchasing shares as a use for excess cash. About 80 percent of companies do so at the wrong time, including Honeywell, he said in May.

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