Honeywell International (NASDAQ: HON) follows GE’s (NYSE: GE) lead with sweet spin-off of advanced materials division

Honeywell International (NASDAQ: HON)—a diversified American conglomerate with interests across aerospace and industry—is taking a lead from long-standing rival GE (NYSE: GE) and pursuing the spin-off of its advanced materials division into a separate company. The strategic move, set to be completed next year, will create a specialty chemicals firm with $3.8 billion of annual revenue and could be a boon for shareholders who will get tax-free ownership through new shares to be issued.
By siloing out the materials division into a new company, Honeywell hopes to take advantage of increased financial flexibility and unlock value trapped by a well-known phenomenon that can see a large conglomerate worth less than the sum of its parts because different industries can trade at diverging EBITDA multiples. After the separation, the legacy Honeywell will focus on automation, aviation and energy.
“This new company will have a greater strategic focus on innovation, enabling it to develop new, more sustainable solutions and products with next-generation chemistry to create further value for shareowners,” Honeywell CEO Vimal Kapur said. He’s hoping to strike the same pot of honey that GE found with a separation that was finalized earlier this year after existing shareholders were given shares in two new firms created from its healthcare and energy divisions. Honeywell hasn’t yet said how much stock existing shareholders will get in the new company or what it will be called, although the transaction should be completed in 2025 or early 2026.
Kapur said the new chemicals company deserved a premium in terms of valuation over its peers because of its higher margins and growth prospects. “The business should get attractive multiples,” he told analysts.
While Honeywell shares have risen 6.2% since the spin-off was first announced last week, the bigger gains may come after shares of the new company are distributed to current shareholders and start trading. A study published last year in the Journal of Financial Risk Management found that while spin-off transactions do tend to increase shareholder wealth, the most value creation comes from the new companies. Parent firms do typically see gains immediately after a spin-off announcement, but it’s the freed assets that see abnormal, above-average returns in the long-run.
“It can be assumed that the announcement of a spin-off transaction is profitable for the parent company,” the authors of the study wrote. “The effect is greater for the spun-off firms themselves since they are smaller and have a greater degree of focus on their core business when they join the market than the corresponding parent company.” They said that the announcement of a spin-off can, on average, lead to an immediate bump of 3.4% for the parent company. The new companies that result, meanwhile, see average gains of nearly 14% in the first year of trading.
A look at GE’s initial separation into three companies generally tracked the pattern identified by the researchers, although at super-charged levels. GE’s original shares rose nearly 70% in the immediate aftermath of the initial announcement nearly three years ago. The first company to be spun off—GE HealthCare Technologies (NASDAQ: GEHC)—saw its shares surge as much as 37% in the first year of trading, before going even higher. The second new company to emerge—the energy-focused GE Vernova (NYSE: GEV)—gained as much as 95%. The remaining GE, which now focuses on aviation and operates as GE Aerospace, has continued to boom, with its shares rising nearly 119% over the past year.
Honeywell, whose shares have underperformed the S&P 500 so far this year with a meager increase of 3.3%, is planning continued adjustments to its portfolio and said the legacy company is on track to deploy at least $25 billion “toward high-return capital expenditures, dividends, opportunistic share purchases and accretive acquisitions through 2025.” So far this year, the company has completed acquisitions of Carrier Access Solutions, Civitanavi, CAES and Air Products’ liquefied natural gas business.
“Are we done from our work on portfolio?” CEO Kapur responded to analysts on a conference call about the spin-off when asked if additional divestments could occur. “The answer is no. There are still more opportunities we continue to work on…As we make more progress, please stay tuned on more portfolio actions.”
Investors have already been rewarded with the gains that followed the announcement of the coming spin-off, but the more significant value creation event may still be on the horizon as plans for the chemical division’s separation emerge. With Honeywell planning to keep its aviation and energy divisions under the same roof for now, however, an even bigger question may be whether the company should follow GE’s example more fully and continue spinning off divisions in pursuit of unlocking more shareholder value.