Deal Reporter
Honeywell (NYSE:HON) will continue to pursue buys after announcing an agreement to acquire the Elster division of Melrose Industries, according to CFO Tom Szlosek.
During the conference call on Tuesday (28 July) held to discuss the deal, Morgan Stanley's Nigel Coe suggested that Honeywell still had ample balance sheet capacity, and asked if the company was done on M&A for this year or could do one or two additional deals.
"I don't think we're done," Szlosek replied. "I don't really think this changes our focus on it, the efforts that we're devoting towards it, our pipeline. We've got a number of attractive things, and we're going to keep going. So we're excited about the environment ... and we're going to keep pushing forward here."
In his opening remarks on the call, Szlosek said the purchase of Elster, which is based mainly in Mainz-Kastel, Germany, would provide runway for future organic growth and additional M&A in the combined business.
The company announced Tuesday it will pay USD 5.1bn for Elster, a provider of thermal gas solutions for commercial, industrial, and residential heating systems and gas, water, and electricity meters, including smart meters and software and data analytics solutions. Elster's consensus sales for 2015 are estimated to be USD 1.8bn. Honeywell expects the deal to close in the first quarter of 2016.
In his overview of the deal on Tuesday's call, CFO Szlosek noted Honeywell's three principal deal hurdle requirements: IRR greater than Honeywell's cost of capital; year five book ROI including amortization of intangibles and other purchase accounting items greater than 10%; and earnings accretion in year two after close.
"This acquisition will meet all three of those requirements, enabled by the expected 8%-plus cost synergies," he said.
Deal process, regulatory outlook
On the call, Barclays analyst Scott Davis if the process had been an auction.
"We termed it a public company process, but the reality is that we worked very closely with Melrose and we actually had private company-type due diligence. We're very comfortable with the access that we had, and it was a fairly lengthy process," Szlosek replied.
Asked later in the session by Bernstein's Steven Winoker why Honeywell did not buy Elster in 2012 when it was available before being acquired by Melrose, Szlosek said Honeywell had "other priorities at the time" though "it certainly was something on our screen."
At the end of the call, asked by Goldman Sachs analyst Joe Ritchie about potential antitrust hurdles and if any portfolio overlap could create uncertainty in the approval process, the CFO said Honeywell said done a careful screen in this regard.
"We don't think there are any material antitrust issues on our screen, but obviously it's a process we don't control," Szlosek said. "And you've got the big three regulators that we need to deal with, the U.S., Europe and in China. We're going to pull out all the stops to get this done as fast as we can. We've got Melrose's commitment on that as well. And we, knock on wood, hope that will not be a major factor in this."
Honeywell's financial advisors during the past half-decade have included Deutsche Bank and Rothschild. For legal, Bingham McCutchen, O’Melveny & Myers and Jenner & Block have been used on multiple acquisitions in recent years, according to the Mergermarket M&A database.
Morris Township, New Jersey-based Honeywell has a market capitalization of USD 82bn.