Less than two months later, the review is apparently done and the company will spin off its automotive experience business to shareholders sometime over the next year. The auto business generated over $22b in sales last year or over half of the entire company’s revenue. Despite the rather large top line and dominant market position, margins in the automotive business are low and due to the automotive cycle, it is constantly subject to negotiations and uncertainty. Crain’s suggests that the margin squeeze is due to new purchasing strategies being employed by the OEMs whereby they purchase each component at the lowest cost instead of buying the final, assembled product. Bruce McDonald, JCI’s vice chairman and EVP, will become chairman and CEO of the new company, while Beda Bolzenius will become its President and COO.
Apparently, there was some surprise at the speed with which the company came to its decision. UBS’ Colin Langan think ‘there is a little disappointment with the spin versus a sale…But personally, I don’t think it is a big deal either way; only if they sell it, JCI would have gotten a lot of cash.’ Mr. Molinaroli said the reason the decision came so quickly is that its partners, suppliers and customers wanted clarity on the situation. Perhaps. Although it is somewhat curious, the company could always revisit a sale, especially if someone gets very interested, whereas the spin process takes a long time.
Mr. Molinaroli will stay with the slimmed down Johnson, which will focus on batteries and climate control for buildings. Despite the smaller scale, the economics of these businesses are far better and there is less ‘uncertainty’. It’s always interesting to note where the CEO chooses to park himself post-spin.
As if separating an entire unit wasn’t enough of a bear to tackle, Mr. Molinaroli also announced that as part part of the spinoff, the company would begin a ‘comprehensive cost savings program’. According to Mr. Molinaroli:
We are making significant changes to our multi-industry portfolio to drive future growth and increased shareholder value. We see considerable opportunities for growth in our buildings and energy storage businesses, and expect increasing bottom-line benefits from the Johnson Controls Operating System as we leverage our scale and expertise across the businesses…Even in this time of change, however, our top priority remains operational excellence and consistent execution with a strong focus on our customers. We expect to complete fiscal 2015 with record results, providing strong momentum as we enter fiscal 2016.
Hacking away at costs is always a good thing and is just another shareholder friendly measure enacted by Mr. Molinaroli. Many are painting this as a good business (margin-wise) vs. bad business split. Although the automotive business has a dominant market share position and some avenues of growth, it just hasn’t been able to improve its profitability. After this split, it will now be entirely exposed to the automotive cycle so it will be interesting to see how it fares during the next severe downturn. Things could get ugly. On the other side, Mr. Molinaroli will have to show he can continue delivering the growth without the auto business to fund its expansion plans.
Disclosure: Author holds no position in any stock mentioned.