Cost Synergies At Johnson Controls Could Drive Upside

While it's too early to determine whether the combination of Tyco Fire & Security LLC and Johnson Controls International plc JCI would create a great company, share appreciation may be limited in the near term due to the FY 2017 outlook potentially being “pretty noisy,” Wells Fargo’s Richard Kwas said in a report.

Kwas maintained a Market Perform rating on Johnson Controls, saying that cost synergies could lend upside.

Cost Synergies

“Our review of historical industrial mergers and acquisitions indicates there is potential upside to stated synergies,” Kwas wrote. He estimated incremental operating cost savings of at least $100 million, in addition to the $900 million already indicated by the company.

The analyst further mentioned that revenue synergies “could be tangible.” He noted that prior industrial transactions had yielded revenue synergies of 4-5 percent of target revenues, and applying that ratio implies a potential revenue synergy opportunity of $400 million over a multi-year period.

NewCo

“At current levels, we see modest upside potential when including our estimated equity value for Adient,” Kwas stated. He believes that the combined JCI-TYC equity could trade in the mid-40s and that the Adient spin-off would be worth $6 per share for the “new” JCI shareholders.

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