Honeywell International Inc (HON.N) has made its largest purchase in more than a decade, agreeing to buy the utility consumption metering business of Britain's Melrose Industries Plc (MRON.L) for about $5.1 billion.
The move, announced on Tuesday, is the first major deal for Honeywell, the U.S. diversified industrial manufacturer, since it laid out a five-year plan in March 2014 to target at least $10 billion in acquisitions. Investors have been eager to see how industrial companies use their capital as many of their markets struggle for growth.
The acquisition will give Honeywell access to Elster Group's metering technology and customers in the highly regulated heating, controls and metering industries, including smart meters and data analytics.
"It’s a very good strategic deal," Sterne Agee CRT analyst Peter Arment said. "You’ve seen growth of smart-metering technologies for the last ten years and I think there’s a long way to go."
Honeywell shares rose nearly 2 percent at $103.61 in mid-day trading, while Melrose was up nearly 10 percent.
The acquisition is Honeywell's largest since its merger with Allied Signal in 1999 and the biggest under David Cote, who became chief executive officer in 2002.
But the company, whose products range from aircraft systems to climate control, is still on the prowl. Asked on a conference call with analysts if the company was done striking deals this year, Chief Financial Officer Tom Szlosek said: "I don't think we're done ... We're going to keep going."
In fact, the Elster deal provides a new platform for acquisition targets, Honeywell executives said.
Elster's sales are estimated to be $1.8 billion this year, with roughly two-thirds in natural gas, and the rest in electricity and water markets.
Analysts at RBC Capital Markets and Morgan Stanley said the price for Elster, which Honeywell put at 12.6 times estimated 2015 core earnings, was reasonable.
The all-cash deal is expected to close in the first quarter and have a "minor" negative impact on earnings next year, Honeywell said.
A source familiar with the matter said Honeywell had approached Melrose earlier this year. The two sides quickly began talks and no other bidders were involved, the source said.
Melrose, an engineering turnaround specialist that buys businesses with the intention of selling them at a profit, said it would return more than 2 billion pounds to shareholders after the sale.
Melrose Executive Vice-Chairman David Roper said the sale of the entire Elster business, which the company acquired in 2012, happened sooner than planned. The market had expected the business to be sold in parts.
"I think we've always said that if an opportunistic bidder comes along and offers tomorrow's price today, we will talk to them," Roper said.
The sale leaves Melrose with only one business, Brush, a manufacturer of electricity generating equipment.
Melrose CEO Simon Peckham said the company was scouting for an acquisition in the range of 2 billion pounds, preferably in northern Europe or North America.
Rothschild [ROT.UL] acted as lead financial adviser on the deal for Melrose, while JP Morgan (JPM.N) also advised Melrose, and Investec acted as joint broker.