Picking the Winners of the Honeywell Breakup

Motley Fool Hidden Gems Investing - The Motley Fool

The podcast explores the Honeywell breakup and its resulting spin-offs, analyzing each new company's potential. It also covers recent M&A activity, including data center and building materials deals, while discussing inv

Key takeaways

• Honeywell's breakup created five distinct companies with independent growth paths

Transcript preview

We're talking match-ups and breakups today on Motley Fool Hidden Gems Investing. Welcome to Motley Fool's Investing. I'm your host, Tyler Crow, and today I'm joined by longtime fool contributors, Matt Frankel and Lou Whiteman. So we just got to the end of the Honeywell kind of breakup phase that's been going on for a year, so we're going to dive deep into that today, and of course we're also going to hit the mail bag like we always do. But we wanted to start today with, July 4th weekend coming up and apparently Wall Street bankers want to clear their plates before the July 4th weekend because there's been a ton of deals that have happened in the last couple of days. Yesterday John Koss, the host and company they covered the Comcast split and the Rocket Lab acquisition Matt I think you were part of that discussion there and since then we've seen even more deals come through. I've read four of them I've read four of them I've read four hours. I've read four hours. I've read four of them and what I want to do today is we're going to tell me. had digital realty buying data centers from Blackstone for about 3.5 billion. We have Carlisle Companies, a building supply company doing an unsolicited bid for Owens Corning. So not done yet, but looks like something's going to happen. You've got a materials company, Martin Marietta Minerals, buying a limestone supplier for 13.5 billion. And then on semiconductor is buying synaptics for about 7 billion. So Matt, I feel like somebody who loves a Reets is going to go in a certain direction here, am I right? Yeah, I mean, I like playing the AI boom with stocks that I understand, like the, you know, the Picks and Jubbles plays, the infrastructure plays, like data center Reets. Digital Realty has been probably one of the top two or three longest running dividend stocks in my portfolio. The deal is interesting to me. The stock is down 5% after the deal. The company is purchasing Blackstone's, you know, roughly two thirds interest, of them in three data centers in northern Virginia for 3.5 billion dollars. 1.2 billion is coming in cash, the other 2.3 billion digital realty is issuing new shares. They're going to need about 1.4 billion dollars of additional cap-ex to complete the development of these. None of them are occupied or operational yet. And digital realty is assuming some debt as part of the deal as well. So they were already the minority owner of these three properties just to be clear. They're just buying out blackstone's. stake. All three of them are already 100% leased to hyperscalers on 15-year deals with 3.6% annual rent escalators. So it should help the company more than keep up with inflation when it comes to their rent. Two of them are supposed to be occupied and stabilized in the first half of next year, the third in the first half of 2028. Matt, you're making a pretty compelling case here, but the market doesn't seem to agree because the stocks down about 5% like as we're recording. So why do you think the market may be a little less, you know, as on board with this idea as you are? Yeah, and it's a good question. There are a few different reasons why. So I mean, for one, digital realty says this is going to be a creative to FFO, which is funds from operations, the real estate, real estate version of earnings, but not until these properties are fully occupied and stabilized, which won't happen for a while. In the near term, it's probably going to hurt the earnings numbers. Plus, plus, as I mentioned, as I mentioned, as I mentioned, they're selling $2. and not only that but Blackstone selling 2.3 billion dollars of its own digital realty stake. So it's a deluded deal. You're going to see a lot of stock on them hit the market at the same time. The FFO benefit is delayed. It's a fair price. It's a cap rate of 6.5% in real estate, which is, that's okay. It's a fair price. It's a fair price. It's not a top-quality asset. It's not a perfect deal. But long term. I like the strategy here. to buy low and sell high and for Blackstone they're cashing out on an asset with massive continuing cap-ex at a premium. I get it for digital reality I'm not saying it's gonna be a terrible deal for them but I'd rather be sitting on Blackstone's side and I do think that this is this is what private equity does well but you know I don't want to be boring and just focus on one deal so let's broaden a bit. Teller Carlisle's bid for Owen's Corning and then the Martin Mary at a deal that there are management teams out there who think it is time to be greedy when others are fearful. There's been a ton of headwinds in construction, especially on the residential side. We'll see, they may be too early here, but the sort of animal spirits in construction slash residential construction, I feel like as an investor, even if I don't want to invest in those companies, it's a data point I should pay attention to that these management teams feel like it's time to. stick their necks out. Yeah and this isn't certainly isn't the like the first time we've been hearing this consolidation of the building products space going on in the past couple of years I feel like this has been a a continuing trend in a slow market and whether that's to grow the top line now well everything's weak or to your point of seeing the bottom one of the companies that we like to discuss here or at least the man behind a lot of companies Brad Jacobs a company, QXO, which is basically a building products roll-up company. It recently acquired TopBuild, which was an insulation building products company. There is a lot of consolidation going on here, and it's an interesting, like, side note to me because a lot of these companies have been for much of the 2010s and into the 2020s. They were good, like, quality companies doing really well that have hit the skids. And I, it's going to be fascinating. to see when renovation new build cycle starts again with these kind of beefed up companies whether or not you know these acquisitions made them better or they just kind of made them bigger right because sometimes acquisitions can go both ways we're still too early but how too early are we here is kind of and and you know and the management's wherewithal to get things done