Honeywell Advanced Materials Spin-off Notes

October 9, 2024 Update

Resources

Reuters: Honeywell to spin off advanced materials unit in CEO’s growth push -October 2024

WSJ: Honeywell Plans to Spin Off Advanced Materials Business –  October 2024

Advanced Materials Spin-off Presentation – October 10, 2024

Advanced Materials Spin-off Transcript – October 10, 2024 

On October 8, 2024, Honeywell (HON) announced that it will spin off its advanced material business. The tax free transaction is expected to be completed by the end of 2025 or early 2026. Here is the slide deck that was published. Here is a transcript of the spin-off call.

The Advanced Materials portfolio includes leading brands such as Solstice®, Spectra®, Hydranal® and Aclar®, among others. The spin-off will be a leading provider of sustainability-focused specialty chemicals and materials with approximately $3.8 billion of revenue (~10% of Honeywell total revenue) and an EBITDA margin greater than 25% expected in FY24. Examples of products that it makes: bullet-resistant armor, nylon, computer chips, and pharmaceutical packaging.

Why is Honeywell spinning off this business? 

It doesn’t fit with its three megatrends: automation, the future of aviation and energy transition (Honeywell has been busy buying businesses that fit this theme). In addition, the advanced materials business is more cyclical and capital intensive than Honeywell’s remaining business.

Nonetheless, this business looks reasonably attractive. I’m still digging in to find the best comps, but it seems to me that 3M (MMM) would be a reasonable comp. 3M trades at 3.2x NTM sales and 11.4x NTM EBITDA. Using these valuation multiples would imply a fair enterprise value of $10BN to $12BN. This is inline with Barclay’s estimate of $11BN. 

Honeywell is a high quality company but priced as such at 20x forward earnings and 15x forward EBITDA. I don’t think this idea is necessarily actionable today. If the spin-off sells off sharply, it could be a good buying opportunity. But we are going to have to wait at least 12 months for the spin-off to take place.