Well, it's official now.

Less than 48 hours after The Wall Street Journal first reported that HVAC giant Carrier Corporation (CARR -0.67%) was in "talks" to acquire privately held German rival Viessmann Climate Solutions for "more than $10 billion," Carrier itself confirmed the deal in a press release Tuesday night -- with one caveat:   The actual purchase price won't be $10 billion, but rather 12 billion euros (i.e. $13.2 billion), paid in cash and stock.

What investors think about that

Investors don't seem overly enthused by the news. Carrier shares sank 3.5% after Carrier confirmed the reports (although the fact that Carrier also reported a 72% year-over-year decline in quarterly profit may have also contributed to investors' dismay). 

It's not entirely clear which of the two press releases is weighing more on investors' minds right now. On the one hand, earnings were pretty bad. On the other hand, they were less bad than they might have been because analysts had been expecting an even bigger decline in earnings. And now we have this third hand to think about -- Carrier's decision to lay out $13.2 billion that it doesn't actually have (total cash reserves are $3.5 billion, and Carrier is already carrying $9.5 billion in debt) to expand its international footprint. 

What is Carrier thinking?

So what exactly lies behind Carrier's desire to own Viessmann?

Well, as management explains in its press release, Carrier considers HVAC to be its "most attractive segment," which is understandable. Carrier currently gets nearly 66% of its $20.4 billion in annual revenue from HVAC sales, and derives nearly 58% of its operating profits from the segment as well. HVAC earns Carrier a very respectable 19.5% operating profit margin, according to data from S&P Global Market Intelligence. HVAC is also the company's strongest growth business by far, with sales up 48% over the past five years.

Indeed, at the same time as Carrier is planning its Viessmann acquisition, it's planning to sell its other two businesses, refrigeration and fire & security. Thus, if Carrier can take the cash it receives from unloading its non-core businesses and pivot to become a pure play on HVAC, you can probably assume that Carrier will get even better at doing just one thing well.

These are all strong arguments in favor of doing the deal.

But at what cost?

Carrier calculates the cost of its purchase at "13 times projected 2023 EBITDA," which implies that Viessmann does a nice, round $1 billion in annual earnings before interest, taxes, depreciation, and amortization (EBITDA). (Later in the same press release, however, Carrier says Viessmann's 2023 EBITDA will be only $770 million, which would work out to an EBITDA multiple of 17, so take these forecasts with a few grains of salt.) Either way, compared to Carrier's own valuation, which is currently almost precisely 20 times trailing EBITDA, this sounds like a very nice price.

It will be even nicer if Viessmann helps Carrier grow faster.

In Q1 2022, Carrier grew its sales 13% year over year -- albeit organic growth (i.e. not counting revenue added from acquisitions) was only 4%. In contrast, Carrier notes that Viessmann has managed to grow both sales and EBITDA at a compound annual rate of more than 15% over the last three years -- and the company is forecasting further double-digit growth rates through 2030. Of particular note, Carrier says that Viessmann "specializes" in heat pump sales in Europe, and the market for heat pumps in Europe is expected to literally triple in size (to $15 billion) by 2027.   

Again. Nice.

Admittedly, there are downsides to the transaction. Carrier plans to pay about 20% of the purchase price to Viessmann's owner in stock, so there will be some stock dilution involved here. The remaining 80% -- $10.6 billion -- will be paid in cash. And as already mentioned, Carrier doesn't actually have $10.6 billion lying around, so unless it gets some great prices for the business segments it is exiting, Carrier will have to take on some debt to do this deal.

That's probably not great news given how high interest rates have gotten lately. But given the potential for Carrier to extract cost-saving "synergies" from the deal (Carrier estimates it can save about $220 million in costs "primarily from procurement and insourcing"), and the chance to significantly boost Carrier's growth rate by absorbing faster-growing Viessmann, this generally looks like a good deal to me.

While many details remain to be finalized -- notably how much cash Carrier can get for its refrigeration and fire & security businesses, and how much debt it ends up with -- on balance I have high hopes for this corporate transformation to bear fruit. At a valuation of just 14 times earnings currently, it may be worth putting the stock on your radar.

As further details come out, and the picture firms up a bit, buy more depending on how much you like what you see.