Honeywell Pays $5.1 Billion for German-Based Elster -- Update

By Alex MacDonald 

LONDON-- Honeywell International Inc. said Tuesday it has agreed to buy German-based energy and water business Elster Group GmbH from the U.K.'s Melrose Industries PLC for GBP3.3 billion ($5.1 billion) in cash.

The purchase is in keeping with Honeywell's aim to expand its metering business into high growth product areas and regions. It also fits with the company's strategy to grow its business through mergers and acquisitions. Although the company's pace of M&A activity had slowed considerably over the past year, Honeywell said recently it planned to spend $10 billion on M&A through 2018.

Elster Group, which comprises Elster Gas, Elster Electricity and Elster Water, is a leading global provider of gas, electricity and water meters and related communications, networking and software solutions. Elster had gross assets of GBP2.5 billion at the end of last year and employs about 6,800 people in 39 countries, including the U.S., Germany, U.K. and Slovakia.

The deal, which includes the transfer of GBP900 million of pension liabilities to Honeywell, is forecast to close in the first quarter of 2016, subject to approval from Melrose shareholders and regulators. Honeywell said the deal wouldn't have any impact on this year's full-year earnings guidance and would only be slightly dilutive to its earnings-per-share the following year.

"We expect that energy efficiency initiatives and mandates and the increased need for natural resource management will drive meaningful and sustained growth for Honeywell in the metering segment," said Honeywell Chairman and Chief Executive Dave Cote. "This acquisition will allow...numerous cross-selling opportunities for existing Honeywell technologies." It will also offer a new platform for acquisition targets, Mr. Cote said.

For Melrose, the deal represents a significant return on investment since it first acquired the business in August 2012 for GBP1.8 billion. Melrose, which focuses on turning around manufacturing businesses for a profit, said it has generated a 33% internal rate of return within the three years since acquiring Elster.

Melrose intends to use the proceeds to return capital of over GBP2 billion to shareholders and for general corporate purposes, including paying down existing debt.

The sale implies a multiple of 3.1 times Elster's 2014 revenue of GBP1.05 billion and 14.3 times 2014 adjusted earnings before interest, taxes, depreciation and amortization.

"I am pleased that we are able to deliver this return to shareholders earlier than we had originally anticipated and have every confidence that Elster will continue its success story under the ownership of Honeywell," said Melrose Chairman Christopher Miller.

Melrose shares were up by around 10% midmorning.

Investec Securities analyst Michael Blogg said: "We see this as an excellent outturn" for Melrose.

Melrose also reported Tuesday a 14% rise in first half net profit from a year earlier and declared an interim dividend of 2.8 pence a share, in line with 2014.

Write to Alex MacDonald at [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires