Johnson Controls (JCI) will spin off its automotive interiors unit into a separately traded company on Oct. 31, 2016. The Milwaukee-based industrial giant plans to distribute one Adient share, as the division is called (with a ticker ADNT), for every 10 JCI shares. Johnson Controls makes car batteries and interior parts for combustion engine and hybrid electric vehicles as well as energy-efficient HVAC systems for commercial buildings. Products include seating, instrument panels and a variety of electronics. Johnson Controls ($37 billion in annual revenue), was seen as too much of an automotive parts company, too linked to the low-margin sector to command a big multiple.
Spin-off Adient Ltd. designs and manufactures interior products and systems for passenger cars and light trucks, including vans, pick-up trucks and SUVs. The product line includes complete seating systems and interior components, including instrument panels, floor consoles and door systems. Adient generated $20 billion in sales in 2015.
In addition to the spin plan, JCI will complete its merger with building fire and security systems provider Tyco International (TYC) on Sept. 2. The merger will allow the company to become more focused on selling and managing heating, cooling and security equipment for big buildings, and shifts its headquarters for tax purposes to a Tyco office in Cork, Ireland. The newly merged company will be called Johnson Controls International.
We are bullish on the spin/merger. JCI is strong in the Americas and Asia while Tyco is a leader in Europe. Cross-selling opportunities along with cost savings should goose operating margins. Adient provides about half of JCI sales. But once Adient (with a relatively low 5.8% margin in fiscal 2015) is removed, the 8% margin of building systems and 17% at the batteries unit will shine through.
We value the “new” Johnson Controls International (core JCI including Tyco) and Adient (the spin-off) at $51 per share. This suggests about 15% upside from the current JCI stock price of $44.30. We value new JCI at $45 per share based on 2017 estimate P/E multiple of 15.0x and 2017 estimate implied EV/EBITDA multiple of 11X. Our average fair value estimate for Adient is $6 per JCI share (based on an 8X estimated 2017 EPS and an EV/EBITDA multiple of 4.2%). The distribution of Adient shares, as a foreign-domiciled London firm, to JCI shareholders will be taxable, so the return to U.S.-based shareholders could be a few percentage points lower.