Breakup alarm rings at $50 bln building superstore
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jeffrey Goldfarb
NEW YORK, May 29 (Reuters Breakingviews) -The cold wind blowing through Johnson Controls International JCI.N is not from its heavy-duty air conditioners, but instead from pushy investors who could call time on boss George Oliver’s tenure leading the $50 billion industrial conglomerate. The biggest issue: a merger he helped orchestrate eight years ago has turned out to be mostly hot air.
Oliver became chief executive soon after Johnson Controls acquired Tyco, the company he was running, for about $17 billion. Tax avoidance played a role, relocating the U.S. buyer’s headquarters to lower-rate Ireland. The duo also promised revenue uplifts from cross-selling heating and cooling with fire sprinklers and video surveillance.
The results have been underwhelming. Since 2019, the year after Johnson Controls sold its car-battery division for $13 billion, the remodeled company’s compound annual top-line growth has been less than 3%, compared to a five-year average of about 7% for companies tracked by the S&P 500 Index .SPX, according to FactSet. Its total shareholder return, including reinvested dividends, of about 100% since Oliver became CEO broadly tracks with fellow building-security providers. But rivals in heating, ventilation and air conditioning Lennox International LII.N and Trane Technologies have generated returns of 200% and 400%, respectively, over the same span.
These disparities help explain the arrival of aggressive fund managers Elliott Management and Soroban Capital. They have not said what they want. Given the company’s performance, however, it would hardly be surprising to see a push to replace Oliver, or even for a breakup that effectively unpicks the Tyco transaction.
For now, Oliver is sticking to his one-stop shop idea. He wants Johnson Controls to secure higher-margin service deals for as much as 90% of its commercial contracts, up from nearly half now, while offloading a quarter of the company’s existing portfolio, probably residential HVAC. The premise is to persuade investors to regard the company more like elevator operator Otis Worldwide OTIS.N, which trades near 17 times anticipated EBITDA over the next year, using estimates compiled by LSEG.
Looked at another way, climate-control peers command valuation multiples of about 18 times. Despite Johnson Controls deriving half its earnings from commercial heating and cooling, according to Wolfe Research analysts, it trades closer to the 13 times at which fire and security specialists trade. The valuation gap is even more vexing given the construction frenzy in data centers, which have substantial cooling needs. Updated energy-efficiency rules also will prompt additional spending on new and existing buildings.
Instead of fully capitalizing on these upswings, Oliver has been trying to justify the lackluster Tyco deal. For all the warning sensors Johnson Controls produces, it failed to detect the risks of the strategy.
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CONTEXT NEWS
Activist hedge fund Elliott Management has accumulated a stake worth more than $1 billion in Johnson Controls International, which installs cooling and security systems in buildings, according to a Bloomberg report on May 19, citing unnamed sources. Fellow pushy investor Soroban Capital also has amassed a position in the company worth more than $500 million, Bloomberg reported a day later.
Johnson Controls fails to heat up investor returns Johnson Controls fails to heat up investor returns https://reut.rs/3X3MvDA
Editing by Jonathan Guilford and Pranav Kiran
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