Shares of Carrier Global (NYSE:CARR) — a leading enterprise in the heating, ventilation, and air conditioning (HVAC) industry — popped higher on Friday on news that it will sell its security equipment business to industrial giant Honeywell (NASDAQ:HON). The deal should streamline Carrier, which effectively becomes a pure-play HVAC entity, thus driving HON stock higher.
According to a CNBC report, Honeywell agreed to acquire Carrier’s security unit for $4.95 billion in cash. Notably, the deal represents Honeywell’s biggest since CEO Vimal Kapur took over the helm. Further, the buyout will offer Honeywell access to Carrier brands such as electronic lock manufacturer Onity and cloud-based lock maker Supra.
For Honeywell, the acquisition should help lift its building technologies business, a segment that has struggled with low revenue growth this year. On the other side of the table, Carrier stated that it will use the proceeds from the transaction to pay down debt, according to a Bloomberg report. Further, Reuters reported earlier this year that Carrier was in talks to spin off its fire and security businesses.
Moving forward, Carrier will be able to focus on its core HVAC specialty, thus lifting CARR stock. However, HON shares slipped roughly 2% in the afternoon session, possibly due to the premium it paid for the deal.
CARR Stock Appears the Overall Winner in the Agreement
As Wolfe Research analyst Nigel Coe stated, there are plenty of reasons to like Honeywell’s deal. “Strategically, this is a hand-in-glove acquisition for Honeywell. It was the most logical buyer and so this is not a surprise.” However, Coe also remarked that for Carrier, the deal represented “a great price,” explaining the jump in CARR stock.
The issue for the industrial stalwart centers on the multiple paid in terms of earnings before interest, taxes, depreciation and amortization (EBITDA). As Barron’s Al Root reported, Carrier disclosed that the value repressed by the nearly $5 billion price tag is about 17X EBITDA. However, FactSet points out that CARR stock trades for about a 13X multiple.
In contrast, HON trades for approximately 15X EBITDA. Per Root, “Honeywell paid a premium and expects to generate cost savings and synergies by slotting the business in its commercial building technology businesses.”
Interestingly, the economy is entering a tricky phase. Although the November jobs report pointed to sustained labor market growth, other clues point to rising anxieties. For example, Bloomberg remarked that the rush to buy luxury watches like Rolex has faded amid higher interest rates and shaky economic growth.
Subsequently, investors prefer Carrier’s streamlining vision versus Honeywell’s expansionary ambitions. Since the start of the year, CARR stock gained 32% while HON fell 9%.
Why It Matters
Interestingly, analysts’ opinions diverge from the performance in the market. Currently, Wall Street experts rate CARR stock as a consensus hold, breaking down as four buys, six holds and three sells. In contrast, Honeywell enjoys a moderate buy view.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
