Adient Spinoff From Johnson Controls To Be Completed On October 31

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Johnson Controls (JCI) completed its inversion deal/merger with Tyco in early September creating a powerhouse in building solutions for efficiency and fire and safety. With the merger complete, the company can now complete the spinoff of its non-core automotive and interiors business, Adient. The spin was announced way back in 2015, but rumors of a spin existed even earlier. The Form 10 was declared effective last week though so the distribution remains on track to take place on October 31st to shareholders as of October 19th. The new company will trade on the NYSE under the ticker ‘ADNT’ and shareholders will receive 1 share of ADNT for every 10 shares of Johnson Controls owned. A When-Issued market is already in place and the company is trading under the ticker ADNT-WI.

Adient recently provided some forecasts for the FY ending September 30, 2017 including:

  • sales in the 2017 fiscal year are expected to reach up to $17 billion
  • adjusted net income between $850 million and $900 million
  • capital expenditures to reach up to $575 million and free cash flow of $250 million, with the latter squeezed from some $400 million in costs associated with new internal technology systems and other financial outlays associated with getting the new company on its feet
  • improved margins

Despite the relatively flat sales forecast, the company expects growth to return now that it can begin to invest more into its businesses. As part of Johnson Controls, the automotive focused businesses were losing out to projects in the higher returning building products division. The company noted it has benefited from the continued strength of SUVs and vans which contain more seats and it is establishing a presence in Silicon Valley in order to ensure its products will be in autonomous and electric vehicles.

As a result of its parent’s inversion deal, the company will be domiciled abroad leading a lower anticipated corporate tax rate of 10-12%. Unfortunately, one of the side effects of that is that the spinoff itself will be taxable to shareholders. Despite the Dublin domicile, the company announced it will move its HQ from Milwaukee to Chicago and hire over 100 new people in various corporate functions. Most of those positions are needed to fill out those groups which were lost in the spin.

Johnson Controls will remain in the S&P 500 post-spin, but Adient will not be a part of the S&P 1500 composite. This, along with the distribution ratio, may create an opportunity due to so-called forced selling and is worth watching.

Disclosure: Author holds no position in any stock mentioned.