With apologies to William Shakespeare: Alas, poor York International (NYSE:YRK), I knew you, but not nearly well enough. So, I'll just have to stand on the sidelines and wave goodbye as you get taken out by Johnson Controls (NYSE:JCI) at a pretty respectable premium.
On Wednesday, Johnson Controls, which makes automotive parts and systems and building controls, announced that it was buying York International, which makes HVAC (heating, ventilation, and air conditioning) equipment, in a $3.2 billion, $56.50-per-share, all-cash deal.
The deal actually makes a bit more sense than you might think at first. True, Johnson Controls gets about 80% of its revenue from selling things like automobile seating, interior systems, and batteries, and the Big Three (Daimler Chrylser, Ford, and General Motors) are about one-third of the company's sales.
But the company also has a long-standing position in building controls -- installed systems that help manage the HVAC, lighting, security, fire control, and other functions of large commercial buildings. So in buying York, Johnson Controls is buying a large manufacturer of one of the prime systems that its controls are designed to manage.
I don't think this deal is necessarily all about reducing the impact of the auto business on overall results -- auto parts will still be about two-thirds of revenue if the deal goes through. Rather, this could also be simply an opportunity to add a valuable, but improvable, asset at a reasonable price. Johnson Controls has proven itself to be a quality manufacturer with good margins relative to its industry. Should that manufacturing expertise prove to be portable, York could be even more profitable under new ownership.
This isn't to say that it's a done deal. While the price offered seems pretty fair, the stock is saying that investors think other bids could come into the picture. Who else might be interested? How about the Nos. 1 and 2 in the HVAC space -- United Technologies (NYSE:UTX) and American Standard (NYSE:ASD)? Or how about Siemens, Honeywell (NYSE:HON), or Ingersoll-Rand (NYSE:IR)? Perhaps even dark horses like LG or Haier could take a look.
I don't think I could advise anyone to buy York shares today on the presumption of a bidding war. Frankly, that's gambling (or at least speculating) and not investing. You could just as readily buy Lennox (NYSE:LII) with the idea that a disappointed suitor may turn to it as a back-up option.
As for Johnson Controls, I sorta liked the company earlier in the year when the auto parts industry seemed to be collapsing. It's maybe not as much of a bargain now, but it might be worth at least a further look for some investors.
For more cooling Takes:
- Why Does Ingersoll-Rand Look Cheap?
- Honeywell's Sweet Success
- American Standard vs. the Street's Standard
- Is United Technologies Underappreciated?
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
