Honeywell seeks M&A as it keeps aero, spins off 2 units

By Alwyn Scott and Arunima Banerjee

NEW YORK (Reuters) - Honeywell International Inc said Tuesday it will focus on fewer business lines, including aerospace, and use spin offs of two other businesses to help fund acquisitions.

The reorganization will simplify Honeywell's broad portfolio, boost growth and give shareholders a tax-free benefit from the new companies, Honeywell Chief Executive Officer Darius Adamczyk said on a conference call on Tuesday.

It also gives diversified manufacturer scope to further change its remaining portfolio along the lines sought by hedge fund Third Point Capital, which had agitated for a spin off of aerospace since April. Third Point said on Tuesday it was pleased with the changes and backed Adamczyk's leadership.

"We've got two exciting new businesses that we think can grow at an accelerated rate," Adamczyk said, referring to the spin-offs, which are due to be completed next year.

"I'm very excited about M&A in all four of our (remaining) businesses," he added. "And I think these two spins ... give me a lot of different levers to invest our M&A dollars."

Analysts praised the moves, but said Honeywell had more changes to make, and warned that the aerospace business, with products ranging from jet engines to airplane WiFi systems, may need to merge to gain the size to compete with larger rivals.

An aerospace spin-off or merger with General Electric Co's aerospace unit would make Honeywell a stronger competitor to United Technologies and a "more powerful supplier to Boeing Co and Airbus SE," Scott Davis, analyst at Melius Research, wrote in a note. "That's a deal worth thinking about."

Honeywell shares were up marginally in New York trading, after falling 2.3 percent initially.

Adamczyk, like his peers at other industrial conglomerates, has been under pressure to pull apart a portfolio of disparate businesses that includes automotive turbo chargers, burglar alarms and the Xtratuf boots popular in Alaska's fishing industry.

Third Point had argued that a spin-off of aerospace, which accounted for about 38 percent of revenue in 2016, could generate $20 billion in shareholder value if sold.

One institutional investor said Honeywell left itself plenty of options - including making acquisitions with the remaining companies.

"This doesn't preclude them coming tomorrow with a reverse merger for aerospace," said the investor.

Honeywell said it will split off its home and ADI global distribution businesses, wholesale distributors of security, fire and environmental systems for homes and commercial buildings, into a public company. It will spin off its transportation systems business, which includes automotive turbochargers, into a second company.

The auto parts move follows other companies, including auto supplier Delphi Automotive Plc, in that are shedding technology tied to the internal combustion engine as regulators around the world crack down on emissions and talk of mandating a switch to battery-electric vehicles over the next two decades.

Honeywell said the two spun-off business units together would generate annualized revenue of about $7.5 billion. It said it would gain $3 billion from the spin-offs.

Ahead of its quarterly earnings report on Oct. 20, the company said third-quarter sales were expected to be $10.1 billion, up 5 percent in organic terms higher than an earlier forecast range of up or down 1 percent.

The company also raised the low-end of its full-year 2017 earnings guidance by 5 cents to between $7.05 and $7.10 per share, and said it would spend proceeds from the spin-offs on share buybacks, acquisitions and paying down debt.

(Reporting by Alwyn Scott in New York and Arunima Banerjee in Bangalore; editing by Patrick Graham and Nick Zieminski)