Deal Overview
On November 12, 2024, Activist investor Elliott Investment Management LP (Elliott) stated in a letter addressed to Honeywell’s Board of Directors that it wants Honeywell International Inc. (NYSE: HON, $233.07, Market Capitalization: $151 billion) to spin-off its Aerospace Technologies (AT) business. In the letter, Elliott revealed that it has acquired a stake worth $5.0 billion in Honeywell, one of its largest investments to date.
The firm suggested that Honeywell divide into two standalone businesses, one focused on automation, energy and sustainability solutions and the other on aerospace. Elliott argued that over the past five years, Honeywell’s inconsistent execution, uneven financial results, and underperforming share price have eroded its strong value creation record. The proposed separation could result in two sector-leading companies that would perform better and provide greater benefits to customers, employees, and shareholders.
Elliott also noted that post-separation, Honeywell Automation could become a stronger, better-managed business with an estimated value of around $100 billion. Elliott believes a separation of Aerospace and Automation would result in share-price gains of 51-75% over the next two years.
Post-separation, the SpinCo would focus on aerospace products and services, providing auxiliary power units, propulsion engines, environmental control systems, integrated avionics, wireless connectivity services, electric power systems and other products. It will also offer spare parts, repair, overhaul & maintenance services and sell licenses or intellectual property rights to other parties.
On the other hand, Honeywell (RemainCo) would focus on automation and energy transition. Accordingly, it will be structured into three primary business segments: industrial automation, which specializes in automation technologies across various industries; building automation, which offers smart building solutions to enhance efficiency and sustainability; and energy and sustainability solutions, which focus on energy-efficient and sustainable technologies.
Honeywell’s management acknowledged Elliott Investment Management’s views but clarified that Elliott has not reached out to it before their recent communication. Management also stated that it looks forward to discussing this matter further and exploring ways to continue delivering value to its shareholders.
On October 8, 2024, Honeywell announced a plan to spin off its Advanced Materials division into an independent, US publicly traded company. The company expects to execute the planned spin in a tax-free manner for its shareholders by the end of 2025 or early 2026.
Deal Rationale
Honeywell Aerospace is a key division of Honeywell International, offering a broad range of products and services for commercial, defence, and space aircraft, including engines, cockpit and cabin electronics, wireless connectivity systems, and mechanical components. In 2023, this segment generated $13.6 billion in sales, making up about 37% of Honeywell’s total revenue.
Over the past five years, the Aerospace segment has seen relatively stagnant sales, with a CAGR of -0.58% from 2018 to 2023 and margins consistently around 28.0%. Despite a significant decline in 2020 and 2021 due to the pandemic, sales only modestly rebounded in 2023. Honeywell has pointed out several challenges, such as persistent supply chain disruptions affecting production schedules and delivery timelines and geopolitical tensions impacting both defense and commercial aviation sectors. Post-pandemic, while there has been an increase in flight activity and demand for aftermarket services, new aircraft orders have not surged as expected. The stable margins and stagnant sales suggest a mature business segment that may require strategic initiatives for future growth and margin expansion.
Activist investor Elliott Investment Management has criticized the Aerospace division’s uneven execution and inconsistent financial results, arguing that Honeywell should split into two standalone businesses focused on aerospace and automation. Elliott believes this separation could create two sector leaders, benefiting customers, employees, and shareholders and potentially increasing Honeywell’s share price by 51% to 75% over the next two years. They estimate that Honeywell Automation, post-separation, could be valued at around $100 billion.
On October 8, 2024, Honeywell announced plans to spin off its advanced materials unit into a publicly traded company and is also considering divesting its personal protective equipment business. Since CEO Vimal Kapur took over last year, the company has been focusing on the megatrends of automation, the future of aviation, and energy transitions and is looking to sell assets that do not align with these trends.
Company Description
Honeywell International Inc. (Parent)
Honeywell International was incorporated in 1985 and headquartered in Charlotte, North Carolina. Honeywell is a multinational conglomerate that provides services in aerospace, building automation, industrial automation, energy and sustainability solutions. Industrial Automation enhances process industry operations with advanced sensors, supply chain automation, and worker safety solutions. Building Automation integrates hardware, software, and analytics to create safe, sustainable buildings, serving over 10 million globally. ESS focuses on reducing emissions, improving efficiency, and supporting the circular economy. As of December 31, 2024, Honeywell has 95,000 employees in over 79 countries, 33,000 of whom are in the US.
Aerospace Technologies (Spin-Off)
Aerospace Technologies will be a global supplier of products and services for aircraft that it sells to original equipment manufacturers (OEM) and other customers in a variety of end markets, including air transport, regional, business and general aviation aircraft, airlines, aircraft operators, and defense and space contractors. AT offerings include auxiliary power units, propulsion engines, environmental control systems, integrated avionics, wireless connectivity services, electric power systems and other products. AT also provides spare parts, repair, overhaul, and maintenance services and sells licenses or intellectual property to other parties. AT business unit accounted for 40.3% of Honeywell’s revenue in 9M24.
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