The acquisition by Honeywell International of the Elster division of Melrose Industries for US$5.1 billion shows not only a great achievement in turnaround from an underperforming business but also a continuing trend towards market consolidation where opportunities are increased tenfold.
The move offers an opportunity to develop the framework behind endpoints like smart meters. By integrating energy efficiency, energy management and metering solutions, new products and solutions will be developed.
Growing smart data market potential
The deal is unlikely to be completed until early next year because it needs regulatory approval in seven jurisdictions from Brazil to the EU, according to Melrose chief executive Simon Peckham.
The reason for this acquisition by Honeywell? The company recognizes the growing market potential in new smart technologies and software and data analytics capabilities which are evolving from the utility meter. Dave Cote, Honeywell’s chairman and chief executive, says the acquisition of metering manufacturer and supplier Elster will also create a new platform for acquisition targets.
Germany-based Elster, with estimated annual sales of $1.8 billion, supplies devices that measure the flow of natural gas, electricity and water. The company’s main operations are in the US, Germany, UK and Slovakia.
Investors in Melrose Industries, which turns around underperforming manufacturers, will share a US$3 billion cash bonanza after the group sold Elster for US$5.1 billion. Honeywell agreed to the deal just three years after Melrose bought for US$2.81 billion. In that time, profitability has improved by around 50%.
The acquisition will give Honeywell access to Elster Group's niche technologies and customers in the highly regulated heating, controls and metering industries. In turn Elster’s products will gain exposure to new customers and markets.
Honeywell, which has set aside $15.6 billion for acquisitions by 2018, said it was paying 12.6 times Elster's estimated 2015 consensus core earnings. According to Mr Cote, the acquisition would generate strong future returns for Honeywell’s shareholders as it increases the firm’s global growth profile.
This latest acquisition reflects Honeywell’s growing interest in the energy sector in general and the smart grid sector in particular. Over the past decade the company has been steadily expanding with more than 80 acquisitions completed. The company already offers a number of technologies and solutions that focus on the efficiency, management, production and security of energy. The company’s website boasts that nearly half of its product portfolio delivers energy efficiency benefits across four industry sectors including transportation, commercial buildings, industrial and residential.
So the acquisition of Elster makes complete sense if it aims to broaden its product lineup.
Looking beyond the smart meter
The market potential in new smart technologies and software and data analytics capabilities is gaining momentum. New technologies include, amongst others, smart grid technologies, energy storage, demand-side management, energy efficiency and electric vehicles. These technologies will not only make energy systems more efficient and resilient; they are also a key step in integrating larger amounts of renewable and distributed generation.
The development of these new technologies leads to the creation of new business models and opportunities for energy companies, as well as technology and service providers. Having meter data collection and meter data analytics and management for instance is important for the value creation and avoidance of commoditisation of the smart metering value chain.
An increasing number of companies are acting on the trend of turning increasingly commoditised products into value-adding services by seeking to better understand their customers, embracing new technology and applying great digital design where needed in the sector.
Honeywell’s acquisition of Elster opens the way for the companies to develop and offer new solutions integrating metering with energy efficiency and management as well as synergistic products for the water and gas sectors. Customers will also be winning as they are exposed to a variety of integrated solutions A wider variety of products and solutions under one umbrella also has the potential to save customers a great deal of time and money.