Take A Seat! Analyst Suggests Johnson Controls Seating Spinoff

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Breakups and spinoff ideas are forming everywhere. The WSJ had an article this past weekend discussing a possible spinoff of Johnson Controls’ (JCI) seating business. JCI operates three different business segments – building efficiency, auto supply and power supplies (batteries) – with auto supply, which includes seating, being the largest segment in terms of revenue. The company has a strong position in this market as it controls over 30% of the $50b worldwide seating market, however, the unit has been struggling with weak operating margins. According to Barclay’s Brian Johnson a divestiture of the seating group ‘would “unlock value,” by raising the company’s operating margin and freeing up cash and resources to expand in the more profitable building systems and services business.’

The company did announce a strategic review of its auto interior assets last October, but so far it has been pursuing smaller asset sales and has made no mention of any spinoff. It sold HomeLink, an automotive electornics business to Gentex last September for $700m and just sold another electronics unit to Visteon (VC) for $265m. Automotive News had a good piece discussing the industry and the growing trend of suppliers shedding ‘non-core’ or struggling assets.

Breaking up Johnson is not a new idea and in fact, CNBC’s Jim Cramer suggested the very same idea roughly one year ago. Noting the few synergies between the various units, Cramer opined that Wall Street would give each one a better valuation if operated independently. Of course, he thought a breakup would send JCI to ~$46 or more conservatively $39.80…prices which JCI has well eclipsed since then sans breakup. 

Unfortunately, the very same WSJ article notes that new CEO Alex Molinaroli has dismissed calls to exit the seating business as recently as last month and has stated that he views seating as a core asset. Although currently struggling, Mr. Molinaroli thinks that with the benefit of some recent acquisitions and increased R&D capabilities, the seating unit can improve its operating margins to 7% by 2018. Things can change though, especially if an activist were to get involved, so we will keep an eye on this name.

Disclosure: Author holds no position in any stock mentioned.

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