Brookfield Business Partners LP and Caisse de dépôt et placement du Québec have teamed up to buy the world’s biggest maker of car batteries.
In one of the largest deals of the year, the two investment firms will pay US$13.2-billion for the Power Solutions business of Johnson Controls International Plc. It’s a leveraged buyout, meaning the new owners will chip in US$3-billion and take on more than US$10-billion in debt to finance the purchase.
Brookfield Business Partners, a Bermuda limited partnership that’s part of Brookfield Asset Management Corp., will contribute about 30 per cent of the equity, as will the Caisse, meaning their outlay will run about US$1-billion apiece. The two will enlist other institutional investors for the remaining 40 per cent of the business.
The transaction is one of the 15 biggest acquisitions in North America so far this year and the second-biggest leveraged buyout, according to data provider Refinitiv.
The Johnson Controls Power Solutions business, in operation for more than a century, provides more than one-third of the world’s vehicle batteries, used in cars, trucks, motorcycles and boats. They’re used in cars that have internal-combustion engines as well as electric vehicles.
The deal is common in today’s market. A publicly traded company shears off a division that is growing slowly and may not match up well with its remaining business. Private equity players eye the business’s stable cash flow and see a way to pull off a debt-financed transaction that will pay off in time.
By selling the car-battery operations, Johnson Controls now considers itself a pure-play provider of technology for buildings, such as heating and air-conditioning equipment, security systems and firefighting mechanisms. It’s a business that has better growth prospects and requires less capital spending, the company says. Power Systems had organic revenue growth of 2 per cent in the fourth quarter, Johnson Controls said.
“A portfolio that was 75 per cent building technologies and 25 per cent batteries didn’t excite most, including us,” analyst Scott Davis of Melius Research wrote on Tuesday. “The battery business is a decent asset in the right hands, but for Johnson Controls was a big use of cash and exposed them to long-term negative trends in auto. … So getting rid of batteries makes a ton of sense. And the sale price seems very fair. And a bit better than we expected.”
Shares of Johnson Controls and Brookfield Business Partners closed the day with gains just under 2 per cent as Johnson Controls ended the session at US$34.78 and units of Brookfield Business Partners closed on the Toronto Stock Exchange at $49.85.
The Power Solutions division posted sales of US$8-billion in Johnson Controls’s most recent fiscal year, ended Sept. 30. The division had EBITDA, or earnings before interest, taxes, depreciation and amortization, of US$1.68-billion, the company said. The division’s margin of operating profit before tax – a measure that includes depreciation costs – slid slightly in the past year to 17.9 per cent, from a recent high of 19.9 per cent in fiscal 2016, according to Standard & Poor’s Global Market Intelligence.
The purchase price is about 7.9 times the past 12 months’ EBITDA, the companies say. One analyst who covers Johnson Controls said in an investor conference call that it was a “very solid headline price” for the business.
By overall transaction value, the deal is one of the biggest among all the Brookfield vehicles, which include funds, partnerships and companies devoted to real estate, energy and other investments. Earlier this year, Brookfield Property Partners took over GGP Inc., buying the two-thirds of the U.S. mall owner it didn’t already own, at a valuation of US$15-billion. In August, Brookfield Business Partners closed its deal to buy Westinghouse Electric Co. for US$4.6-billion, using US$1-billion of its own money and US$3.6-billion in debt and other liabilities.
Johnson Controls expects to clear US$11.4-billion after taxes and deal costs, which will allow it to pay down debt and repurchase shares. It loses about US$1.25 a share in earnings from the business, but anticipates adding 75 US cents from the reduced share count, less interest expenses and US$50-million reduction in corporate costs.
The companies say they expect the deal to close by June 30 of next year.
David Milstead