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Honeywell Buys RAE Systems for $340 Million

By Rich Smith - Apr 23, 2013 at 7:57PM

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Deal looks expensive when valued on earnings or sales.

Honeywell (HON -1.50%) has signed a definitive agreement to buy RAE Systems. Honeywell announced Tuesday that it's signed an agreement to take over the privately held San Jose, Calif., manufacturer of personal, handheld, transportable, and fixed gas, radiation, and photo-ionization sensors.

Honeywell will pay $340 million for the company, a price it says works out to about 13 times RAE's estimated earnings before interest, taxes, depreciation and amortization. The $340 million purchase price also equals a price-to-sales ratio of 3.2.

Both of these valuations seem high, relative to Honeywell's own P/S ratio (1.6), for example, or its price-to-EBITDA of 11.2. But according to Honeywell, it will be able to introduce certain synergies into RAE's business once it's incorporated RAE into its gas portfolio, with the result that going forward, it expects RAE to generate so much profit as to shrink the effective P/EBITDA ratio down to roughly 6.0.

Investors don't seem so sure about that. As major market indices advanced 1% and more in Tuesday trading, Honeywell shares appeared hobbled by the RAE deal price, rising only 0.2% to close at $74.76.

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