Johnson Controls Shops Its Power Solutions Business
A well-structured spin-off or a favorable selling price could create shareholder value for the narrow-moat firm.
When former Tyco CEO George Oliver took the helm of Johnson Controls (JCI) in September 2017, we commented that we saw an increased probability of the firm divesting its power solutions segment, which is the leading global manufacturer of automobile lead-acid batteries. The power solutions segment generated $7.3 billion in revenue (24% of consolidated sales) and $1.6 billion in EBITDA (30% of segment adjusted EBITDA) in fiscal 2017. Our prediction appears poised to become reality. On March 12, Johnson Controls announced it is exploring strategic alternatives for the power solutions business, which should be completed “over the next several months.”
While it’s true that the power solutions business has limited synergies with Johnson Controls’ building technologies and solutions segment, power solutions is growing faster and is more profitable than the firm’s buildings business. We also think that the power solutions segment has stronger competitive advantages relative to the buildings business. That said, we certainly see how a well-structured spin-off or a favorable selling price could create shareholder value. At this time, we’re maintaining our $53 per share fair value estimate and our narrow-moat rating on Johnson Controls, but we'll reassess our valuation and economic moat rating once more definitive information is announced.
If Johnson Controls does decide to divest power solutions, we’d prefer a sale over a spin-off because we think a sale would generate more cash proceeds for Johnson Controls compared with a dividend from a leveraged stand-alone power solutions business. Japanese-based GS Yuasa, the number two player in lead-acid batteries worldwide, is probably the most comparable publicly traded peer. GS Yuasa’s current and 5-year average enterprise value/last 12-months EBITDA multiple is just over 8 times. If we apply this multiple to power solutions’ fiscal 2017 EBITDA, we calculate that the powers solutions business could be worth almost $14 billion.
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Brian Bernard does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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