Did Investors Get A Good Deal With The Sale Of Johnson Controls’ Power Solutions Business?

by Trefis Team
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Market
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Trefis
JCI
Johnson Controls
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Earlier this month, Johnson Controls (NYSE: JCI) announced an agreement to sell its Power Solutions business to Brookfield Business Partners L.P. in a cash transaction valued at $13.2 billion, expected to close in June 2019. JCI is the largest producer of lead-acid automotive batteries in the world, producing and distributing approximately 154 million lead-acid batteries annually. This segment services both automotive OEMs (Original Equipment Manufacturers) and the battery aftermarket by providing advanced battery technology. The company has been investing heavily into launching new products, and has doubled down on the AGM (Absorbent Glass Mat) and EFB (Enhanced Flooded Battery) technologies that power start-stop vehicles, as well as lithium-ion battery technology for certain hybrid and electric vehicles. The sale seems to be the final step in the company’s plans to become a pure-play building technologies and solutions provider, following the spin-off of its automotive interiors unit in 2015, its seating division in 2016, the sale of its safety equipment business to 3M last year, and the merger with Tyco in 2016.

We have a $41 price estimate for Johnson Controls, which is higher than the current market price. The charts have been made using our new, interactive platform. The various driver assumptions can be modified by clicking here for our interactive dashboard on Valuing Johnson Controls’ Power Solution Business, to gauge their impact on the segment’s valuation.

The EBITDA Multiple May Be Lower Than Expected

Johnson Controls’ decision to sell its Power Solutions business is for a cash deal valued at $13.2 billion. However, the net cash proceeds are expected to be $11.4 billion after tax and transaction-related expenses. The proceeds will go towards reducing the company’s debt load to the tune of $3 to $3.5 billion, leaving $7.9 to $8.4 billion available to be returned to shareholders in the form of dividends and share buybacks.

Although the transaction value looks like a fairly large amount, when we delve deeper into it, the deal may not be as good as it may at first seem to be. The Power Solutions business generated revenues of $8 billion and EBITDA of roughly $1.67 billion in the recently reported FY 2018 (year ended September 2018) results. This implies a P/EBITDA multiple of just 7.9, which falls to 6.8 when the after-tax and expense transaction value is considered.

With rising fuel prices as well as stricter vehicle emission norms, advanced batteries that help lower fuel consumption and emissions, are occupying an increasing share of the global auto battery market. It is here that Johnson Controls’ AGM (Absorbent Glass Mat) batteries, by powering start-stop technology in vehicles, are capturing the growth being driven by these two trends. Estimates from Johnson Controls suggest that its AGM batteries improve vehicle fuel efficiency by up to roughly 5%, saving consumers money. Additionally, these batteries lower vehicle emissions, helping auto manufacturers meet stricter emission norms. Currently, more than half of new vehicles built in Europe feature this technology. Other regions, especially North America and China, are also catching up to adopt start-stop technology in vehicles. According to the company, between 2016 and 2020, the global market for the start-stop technology will surge from 25 million to 65 million vehicles in North America, Europe, and China. In our opinion, as start-stop technology is easier to implement and comes with a lower price premium than hybrid and electric technologies, its adoption in cars could grow to levels anticipated by the company.

Hence, given the enormous potential of this segment, we think the EBITDA multiple is too low. On the other hand, if we adjust the segment EBITDA to allocate the financing charges, corporate expenses, restructuring charges, and adjustments for pension and post-retirement plans, resulting in the EBITDA margin dropping to 15.8% from 20.9%, the multiple jumps to 10.4 and 9 (after-tax), which looks much more attractive.

Click here to see our complete analysis of Johnson Controls

 

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