Johnson Controls Inc. (JCI:US) rose the most in six months after agreeing to spin off its auto-interiors business into a joint venture with China’s Yanfeng Automotive Trim Systems Co.
The shares of the Milwaukee-based company rose 4.3 percent to $46.69 at the close in New York yesterday, for the biggest one-day gain since Nov. 21.
Johnson Controls, which is trying to reduce its reliance on the cyclical auto industry, is refocusing efforts on its building-efficiency business. The company, which agreed to sell its auto-electronics division to Visteon Corp. in January, had been exploring options for the interiors unit, which makes door and instrument panels, since March 2013. The unit’s annual revenue had halved (JCI:US) since 2011 and the pact lets Johnson Controls benefit from increased demand for interiors in China.
“This is a good option for JCI,” Joseph Spak, an analyst with RBC Capital Markets, wrote in a note to investors. “It allows JCI to jettison the business so that it can continue to de-emphasize auto and become a more diversified company.”
Yanfeng will own 70 percent of the new Shanghai-based venture, with Johnson Controls owning the remainder, the companies said in a statement on May 18. The venture will have revenue of about $7.5 billion, according to the companies. Johnson Controls will retain its seating business, spokesman Fraser Engerman said in an interview.
Johnson Controls isn’t entering into the agreement with the intent to sell its stake in the business, Chief Executive Officer Alex Molinaroli said yesterday on a conference call with analysts and investors.
“We expect to get dividends and not put cash into this,” Molinaroli said. “We think we’re going to benefit from the growth that’s going to come in that marketplace.”
The joint venture, expected to be operational next year, will have pretax margins of 5 percent to 6 percent and revenue may grow as much as 8 percent annually for the next five years, Bruce McDonald, Johnson Controls’ chief financial officer, said on the call.
The companies’ customer bases don’t overlap much as Yanfeng’s customers are at the lower end of the market and Johnson Controls is concentrated at the premium end, McDonald also said. Yanfeng is a unit of Huayu Automotive Systems Co., which is owned by Shanghai Automotive Industry Corp.
The venture will have engineering and customer centers in the U.S., Europe, China, Japan and India. The products being offered include instrument panels and cockpit systems, door panels and floor consoles. The non-cash transaction is expected to close in the first half of 2015.
Johnson Controls’ automotive-interiors business had annual sales of about $4.2 billion, Engerman said. Johnson Controls had sales (JCI:US) of $42.7 billion in the fiscal year ended Sept. 30.
Engerman didn’t say how many employees would be affected by the move and said the terms are still being decided.
Johnson Controls’ stock has declined 9 percent this year, compared with a 2 percent gain in the Standard & Poor’s 500 Index.
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