Deal Overview
On October 8, 2024, Honeywell international Inc (Nasdaq: HON, $222.35; Market Capitalization: $144.4 billion) announced a plan to spin off its Advanced Materials division (SpinCo) 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.
Post-separation, SpinCo will focus on sustainability-focused specialty chemicals and materials across products like fluorine products, electronic materials, industrial grade fibres, and healthcare packaging solutions. It will include brands such as Solstice, Spectra, Hydranal, and Aclar. The estimated value of the standalone business is approximately $10 billion and is projected to generate approximately $3.8 billion in revenue with an EBITDA margin greater than 25.0% in FY24.
On the other hand, Honeywell (RemainCo) intends to realign its business around three key identified megatrends – automation, aviation, and energy transition. Accordingly, it will be structured into four primary business segments – Aerospace Technologies; dedicated to providing advanced solutions for the aviation industry, Industrial Automation; specializing in automation technologies across various industries, Building Automation; offering smart building solutions to enhance efficiency and sustainability, and Energy and Sustainability Solutions, focusing on energy-efficient and sustainable technologies.
The planned spin-off transaction is expected to be completed by the end of 2025 or early 2026, subject to certain customary conditions, including, among others, the filing and effectiveness of applicable filings (including a Form 10 registration statement) with the US Securities and Exchange Commission, assurance that the spin-off of the business will be tax-free to Honeywell’s shareowners, receipt of applicable regulatory approvals and final approval by Honeywell’s board of directors.
As the transaction progresses, Honeywell intends to provide additional information regarding the future management team and board of directors for the independent Advanced Materials company. Goldman Sachs & Co. LLC is serving as financial advisor to Honeywell. Skadden, Arps, Slate, Meagher & Flom LLP is providing external legal counsel.
Deal Rationale
Honeywell has announced plans to spin off its Advanced Materials (AM) unit, a sub-segment of the company’s Energy and Sustainability Solutions (ESS) segment. The ESS segment provides industry-leading technology, processing, and licensing capabilities to facilitate the world’s energy transition.
The AM business specializes in specialty chemicals and materials while serving industries such as electronics, healthcare, and industrial manufacturing. The segment caters to fluorine products, electronic materials, industrial fibers, and healthcare packaging. While the AM segment contributes to sustainability through products like low global warming potential refrigerants, its broader portfolio does not directly support the energy transition initiatives that are central to the ESS segment. As per management, the planned spin-off of the AM business is the latest step in optimizing the Honeywell portfolio. Through the combination of strategic acquisitions and divestiture of non-core business lines, it aims to enhance its portfolio mix.
Over the past eight years, AM has built a robust economic moat with an efficient supply chain and a global customer base in highly regulated verticals. The portfolio is uniquely positioned to benefit from strong macro trends, such as increasing demand for refrigerants driven by regulatory requirements for more sustainable solutions, growing demand for electronic materials driven by high-end computing, AI and 5G, and a growing need for highly engineered solutions for health care applications. The management believes that a stand-alone, well-capitalized AM segment will benefit from greater financial flexibility in pursuing its agenda and associated investment choices.
The global specialty chemicals market is projected to grow at a compound annual growth rate (CAGR) of 5.2% from 2024 to 2030, reaching a market size of approximately $866.9 billion by 2030. Given the sustained market demand, the management is confident that now is the right time for this business to grow independently, leveraging its leading technologies and deep customer relationships. By separating the AM business, Honeywell will have a smaller and less complex manufacturing footprint, allowing the company to focus its supply chain operations on discrete and batch manufacturing. This simplification is intended to enhance Honeywell’s ability to leverage synergies within its operations, push organic growth capability higher, and reduce cyclicality, ultimately leading to an improved free cash flow profile.
Honeywell is a diversified technology and manufacturing company that provides services in aerospace, building automation, industrial automation, energy and sustainability solutions. Honeywell operates through four segments: Aerospace Technologies, Industrial Automation, Building Automation, and Energy and Sustainability Solutions.
Aerospace Technologies (AT) segment is a major player in the aerospace industry, providing a wide range of products and services for commercial, defense, and space applications. This segment includes the development and manufacturing of aircraft engines, avionics, and auxiliary power units (APUs), which are essential for the operation and efficiency of aircraft.
Industrial Automation (IA) focuses on enhancing the efficiency, safety, and productivity of industrial operations through advanced technologies and solutions. This includes process management, IoT, advanced sensors, and material handling automation. By leveraging its expertise in control systems, cybersecurity, and energy management, Honeywell helps industries optimize their operations, reduce emissions, and improve overall performance. The segment also caters to worker productivity and safety with innovative mobile computing and personal protective equipment, ensuring a comprehensive approach to industrial automation.
The Building Automation (BA) segment focuses on transforming buildings into smart, integrated environments that enhance operational efficiency, safety, and sustainability. This segment offers a comprehensive suite of hardware, software, sensors, and analytics designed to optimize building performance. Honeywell’s solutions help manage energy consumption, reduce carbon footprints, and improve occupant comfort and safety. By leveraging advanced technologies such as the Internet of Things (IoT) and artificial intelligence (AI), Honeywell enables better control over facilities, streamline operations, and respond swiftly to incidents.
Energy and Sustainability Solutions (ESS) segment focuses on enabling the energy transition and improving sustainability across various industries. ESS provides innovative technologies and solutions that reduce emissions, enhance energy efficiency, and support the circular economy. This includes advanced materials, energy storage systems, and sustainable fuel technologies.
In 2023, AT accounted for 40.6% of total revenue, followed by IA (26.2%), BA (16.4%), and ESS (16.8%).
2Q24
Total revenue grew 4.7% YoY to $9.6 billion (+1.7% vs. consensus), driven by strong demand in AT and BA, offset by revenue decline in IA. AT revenue grew 16.5% YoY to $3.9 billion, driven by an 18.7% YoY growth in Defense and Space (D&S) revenue to $1.4 billion, a 17.3% YoY growth in Commercial Aviation Aftermarket (CAA) revenue to $1.8 billion, and a 10.0% YoY growth in Commercial Aviation Original Equipment (CAOE) revenue to $668 million.
IA revenue declined 8.1% YoY to $2.5 billion due to a 41.5% YoY decline in Warehouse and Workflow Solutions (W&WS) revenue to $233 million, a 10.0% YoY decline in Sensing and Safety Technologies (S&ST) revenue to $466 million, a 9.4% YoY decline in Productivity Solutions and Services (PS&S) revenue to $298 million, offset by 1.8% YoY growth in Process Solutions (PS) revenue to $1.5 billion.
BA revenue grew 4.0% YoY to $1.6 billion, driven by 12.0% YoY growth in Building Solutions (BS) revenue to $663 million, partially offset by a 1.1% YoY decline in Building Product (BP) revenue to $908 million. Energy and Sustainability Solutions (E&SS) revenue grew 2.4% YoY to $1.6 billion, driven by 6.5% YoY growth in Advanced Materials (AM) revenue to $1.0 billion, offset by a 3.9% YoY decline in Universal Oil Products (UOP) revenue to $599 million. Operating income grew 5.0% YoY to $2.0 billion, and the corresponding margin improved by ~7bps to 20.7%, driven by strong revenue performance across all segments except IA. Net income grew 3.8% YoY to $1.5 billion (2.1% vs. consensus), while the corresponding margin contracted ~14bps to 16.1%. Adjusted diluted earnings per share came in at $2.49 (2Q23: $2.30), beating the consensus estimates by 4.3%.
FY23
Total revenue grew 3.4% YoY to $36.7 billion (-0.7% vs. consensus), driven by strong demand in AT, and Performance Materials and Technologies (PM&T), offset by revenue decline in Safety and Productivity Solutions (S&PS). AT revenue grew 15.2% YoY to $13.6 billion, driven by a 22.2% YoY growth in CAA revenue to $6.2 billion, a 14.7% YoY growth in CAOE revenue to $2.4 billion, and a 7.7% YoY growth in D&S revenue to $5.0 billion.
BA revenue grew by 0.5% YoY to $6.0 billion, driven by 3.60% YoY growth in BS revenue to $2.4 billion, offset by a 1.5% YoY decline in BP revenue to $3.6 billion. PM&T revenue grew 7.3% YoY to $11.5 billion, driven by 11.3% YoY growth in PS revenue to $5.2 billion, 7.6% YoY growth in UOP revenue to $2.6 billion, and a 1.7% YoY growth in AM revenue to $3.6 billion. S&PS revenue declined 20.5% YoY to $5.5 billion due to a 37.5% YoY decline in W&WS revenue to $1.4 billion, a 24.5% YoY decline in PS&S revenue to $1.3 billion, and a 4.4% YoY decline in S&ST revenue to $2.7 billion. Operating income grew 10.2% YoY to $7.1 billion, and the corresponding margin improved by ~120bps to 19.3%, driven by strong revenue performance across all segments except S&PS. Increased pricing and productivity improvements helped margin expansion. Net income grew 13.9% YoY to $5.6 billion (-7.5% vs. consensus), and the corresponding margin improved ~143bps to 15.4%. Adjusted diluted earnings per share came in at $9.16 (FY22: $8.76), meeting the consensus estimates.
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. AT provides products and services for commercial and defense aircraft, including propulsion and cockpit systems. IA enhances process industry operations with advanced sensors, supply chain automation, and worker safety solutions. BA 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.
Advanced Materials Business (Spin-Off)
The AM business focuses on providing specialty chemicals and materials to various industries, including aerospace, automotive, and electronics. This segment features leading brands like Solstice, Spectra, Hydranal, and Aclar, offering products such as high-performance fibers, electronic materials, and environmentally friendly refrigerants. AM business unit accounted for 10.0% of Honeywell’s revenue in 2023.
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