How Johnson Controls Benefits From GWS Divestiture

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Johnson Controls (NYSE:JCI) recently announced that it had entered a definitive agreement with CBRE Group (NYSE:CBG) to sell its Global Workplace Solutions (GWS) business, which is currently a part of its Building Efficiency segment. [1] The news drove Johnson Control’s stock up by 1.2%. GWS provides facility, energy and corporate real estate management services. Its facility management service is catered to by a full-time on-site staff that performs tasks related to the comfort and reliability of facilities, and manages subcontractors for functions such as food service, cleaning, maintenance and landscaping.

The deal is the result of Johnson Controls’ September 2014 announcement of its decision to divest from GWS. [2] At that time, Johnson Controls was focused on divesting from businesses that were not aligned to its long-term growth strategy. To this end, the company also divested its automotive electronics business and spun off the majority of its automotive interiors business.  The deal with CBRE is expected to close by the end of fiscal 2015.

It might seem odd that a business unit that generates around 10% of the company’s revenue is not a core part of its long-term growth strategy, especially at a time when the global facilities management industry is expected to grow at an average rate of 12.1% from 2014 to 2019. [3] In this article we look at why Johnson Controls wanted to divest the GWS business and the impact it will have on the company.

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Declining Revenues, Low Margins

GWS’ revenue grew 16.1% and 26.3% in fiscal 2010 and 2011, respectively. [4] However, revenue growth drastically slowed down to 3.4% in fiscal 2012. Thereafter, revenue declined 0.7% in fiscal 2013 and 4.4% in fiscal 2014, primarily due to the loss of contracts. A decrease in services to its remaining customers also took a toll on revenues. Additionally, the GWS business generates relatively poor margins compared to Johnson Controls’ other businesses, and as a result it was not an area of focus for management.

The Benefits Of Divesting

The divestiture from GWS will lead to a 10% decline in revenues. However, Johnson Controls’ gains from the divestiture should more than offset this impact.

Cash On Balance Sheet: Johnson Control is selling the GWS business for $1.475 billion in cash. The cash generated should significantly increase the company’s cash balance, which by the end of 2014 was only $168 million. [5]

Improvement In Margins: According to our calculations, Johnson Controls’ Building Efficiency segment’s adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) margin was 8.6% for fiscal 2014. Upon divesting from GWS, the segment could see a 200 basis point increase in margins.

Incremental Revenues: The deal with CBRE also includes a 10-year strategic alliance wherein Johnson Controls will become the preferred supplier of HVAC equipment for CBRE’s portfolio of 5 billion square feet of real estate. Once fully implemented, Johnson Controls expects the deal to generate $500 million in incremental revenues.

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Notes:
  1. Sale of Global Workplace Solutions to CBRE, March 31, 2015, www.johnsoncontrols.com []
  2. Johnson Controls announces its intention to divest its Global Workplace Solutions business, September 30, 2014, www.johnsoncontrols.com []
  3. Facility Management Market by Solutions (CAFM, IWMS, CMMS, BIM, IWMS) & Services – Worldwide Market Forecasts and Analysis (2014-2019), May 2014, www.marketsandmarkets.com []
  4. Johnson Controls SEC Filings, www.sec.gov []
  5. Johnson Controls Q1 FY 2015 10-Q SEC Filing, www.sec.gov []