Honeywell is buying metering giant Elster for $5.1 billion from Melrose Industries.
Melrose purchased Elster three years ago for $2.3 billion. Since then, Elster increased profits substantially, despite the substantial slowdown in metering contracts after the American Recovery and Reinvestment Act (ARRA) ended. At the end of 2014, Elster reported that profits were up two-thirds since the company was acquired by Melrose.
Elster has had some substantial wins in the past few years, including being picked as one of six providers for the first phase of an eventual rollout of 35 million meters by France’s ERDF.
Elster has also grown its footprint in Latin America. Earlier this year, it won a contract with Mexico’s federal electricity company, CFE, for 300,000 meters, along with software to cut down on distribution losses and theft. Elster has also won some contracts in Brazil for electricity and water meters.
“These wins, coupled with notable but not overwhelming activity in the Middle East, cannot alone account for a 120 percent three-year appreciation in the post-ARRA electric advanced metering market,” said Ben Kellison, director of grid research with GTM Research. He added, “This is a noteworthy acquisition, as Elster has not won any orders that drastically enhance its backlog during its time under private equity.”
In North America, Elster has pivoted toward the municipal and cooperative utility market. Cities, in particular, offer the opportunity to layer on additional services as metering companies like Elster have to look beyond the meter to smart-city and internet-of-things projects.
At February's DistribuTECH conference in San Diego, Elster launched its Connexo platform, a data integration and development platform for customers to merge systems such as smart streetlight networks and home and building energy management devices.
Connexo is similar to Itron’s Riva platform and Silver Spring Networks’ SilverLink sensor network -- all are attempts to enlist smart meters as nodes for broader distributed energy management, as well as to allow a broader set of uses and applications to be created around the data being collected and shared by these linked devices.
Elster has also offered its EnergyICT product for many years, which is an energy insight platform for commercial customers. It has some large clients, such as Tesco in the U.K. and Carrefour in China.
Bringing together Elster’s metering with Honeywell’s controls, both in homes and commercial buildings, offers an opportunity for deeper energy and water management for utilities and end-use customers. But Honeywell is not paying a premium for Elster simply for a strong metering solution to marry with its building controls and energy management offerings. “It is likely that Elster's other businesses, its connections to emerging markets, and its leaner structure feature prominently into the surprising $5.1 billion acquisition figure,” said GTM Research's Kellison.
Honeywell’s statement on the acquisition highlighted the attractiveness of Elster’s global presence. “The acquisition of Elster will generate strong future returns for Honeywell’s shareowners because it increases our growth profile globally -- creating both organic and inorganic growth opportunities -- and because Honeywell can run this company effectively and accelerate its growth through our complementary technologies, software knowledge, and presence in high-growth regions,” Honeywell CEO David Cote said in the statement.
There are various potential synergies with Honeywell right out of the gate. One is that Elster’s global footprint offers a large distribution channel for its demand-response solution, according to Andrew Mulherkar, grid edge analyst with GTM Research. Beyond demand response, Elster’s presence in growth regions, such as Latin America, may be beneficial in light of Honeywell’s larger corporate growth strategy. Another opportunity is that it creates a more robust solution for Honeywell in pursuing future smart-city projects.
But much of the acquisition will have nothing to do with Elster’s electric business. Honeywell noted that Elster’s gas-burner products and residential components are “highly complementary to our existing businesses within our Environmental and Combustion Control business.” Also, Honeywell told Greentech Media that Elster’s flow meters and regulators will complement Honeywell’s business arm that serves natural-gas customers.
Honeywell also believes it can squeeze more profit out of Elster’s current operation beyond what Melrose was able to achieve in three years. In the past decade, the Honeywell Operating System (HOS) has helped turn around the large company by adopting an integrated approach to managing the vast organization. It relies on management tools such as Six Sigma and increases efficiencies in every layer of the business, particularly its manufacturing facilities.
“We see Elster as a great opportunity to deploy our operating model and key process initiatives to grow the business, enhance our position globally, and drive significant returns to shareowners over the long term,” said Cote.
The sale price translates to approximately 12.6x Elster’s estimated 2015 EBITDA (earnings before interest, taxes, depreciation and amortization). When it was purchased in 2012, Elster's $2.3 billion price represented at 10x multiple of EBITDA, slightly lower than Toshiba's offer for Landis+Gyr of 11.5x trailing EBITDA in 2012.
The deal is expected to close in the first quarter of 2016, pending regulatory approval.