This year, Johnson Controls announced that it would sell its HVAC business. There are three public bidders: Samsung Electronics, Bosch Group and Lennox International.
I didn’t expect that there would be new progress in the sale of Johnson Controls’ HVAC business so soon.
You should have seen the result – Bosch Group won. I am not surprised by this result.
Details
On July 23, German media reported that German giant Bosch will acquire the home and light commercial HVAC business of Johnson Controls and Hitachi for 7.4 billion euros (8 billion U.S. dollars). At present, the shareholders and supervisory boards of both Bosch Groups have approved the acquisition, and the parties have signed a binding agreement on the acquisition, which is expected to be completed within a year.
It is reported that as part of the transaction, Bosch Group also plans to acquire the Johnson Controls-Hitachi Air Conditioning Joint Venture, including Hitachi’s 40% stake.
However, there are a few details in Bosch Group’s acquisition of Johnson-Hitachi that I still need to remind everyone to pay close attention to.
Background
Johnson Controls was founded in 1885 and is a well-known smart building solution provider in the United States.
Its business involves building automation, HVAC, air purification, security, and fire protection. Its HVAC business includes York International, ADT, and its shares in the joint venture Hitachi.
York International
York Air Conditioning was founded in 1874 and is a world-renowned brand of HVAC and refrigeration equipment. In 2005, Johnson Controls acquired it for US$3.2 billion.
ADT
ADT is a well-known Canadian supplier of air distribution and ventilation products. In 2014, Johnson Controls acquired it for approximately US$1.6 billion.
Hitachi
Hitachi Air Conditioning started in 1983 and is a well-known Japanese brand of HVAC and refrigeration equipment.
In 2015, Johnson Controls acquired 60% of Hitachi’s global air conditioning business, which has annual sales of nearly US$2.6 billion. However, the 60% stake acquired does not include Hitachi’s business and assets in Japan.
My analysis
Spending money requires motivation.
Faced with this deal, who has the strongest motivation among Samsung Electronics, Bosch Group and Lennox International?
Samsung Electronics
Some media analysis shows that Samsung Electronics is the most likely winner.
The reason is that Samsung air conditioners are currently mainly focused on fluorine systems such as cabinets and multi-split units, and the market growth is weak. After the acquisition, it can make up for its shortcomings in water system central air conditioners and provide new market growth opportunities.
I have some different opinions on this:
First, Johnson Controls bought York Air Conditioning, ADT, and Hitachi’s global business for two main reasons:
First, it was to fill the gap in the demand for cold and heat sources and ventilation and purification in smart building solutions.
Second, York Air Conditioning and ADT had excellent scale and profitability at the time.
According to data, York International became the world’s largest independent HVAC, refrigeration equipment, and service provider in 2005, and has the strength to acquire the other party in the acquisition negotiation.
Before being acquired, ADT was a subsidiary of the Canada Pension Plan Investment Board and one of the largest air distribution and ventilation product suppliers in North America. It owns several well-known ventilation and purification sub-brands such as Titus, Trion, and Krueger.
Why would they sell?
Johnson Controls has fallen out of the Fortune Global 500 in the past two years, and its management is so anxious that it seems to overflow the screen, “implying that they will continue to divest non-core businesses that are inconsistent with their focus on building solutions.”
They chose to acquire it because they could achieve the effect of 1+1>2; now they choose to sell it, and the reason is also very simple: they are not making money now and are even negative assets.
This card does not make money in the hands of Johnson Controls, a building and HVAC expert, but it can make money in the hands of Samsung Electronics, a layman? I doubt it.
Why Would Samsung Electronics Buy?
Secondly, the core appeal of family-owned enterprises such as Samsung Electronics, which are deeply tied to the domestic market, is that the foreign market structure is secondary, and the priority is to stabilize their position in their home base.
At present, LG Electronics is the biggest threat to Samsung Electronics in Korea, and the competition between the two sides is all-round.
Unlike the “incomplete” product structure of Samsung air conditioners, although LG air conditioners are not large, they have everything: unit machines, air source heat pumps, screw machines, centrifuges, etc., and even lithium bromide units. Moreover, LG air conditioners have been active in the market in recent years, promoting new products and marketing, and they are in good shape.
The pressure has been put on Samsung air conditioners. Therefore, I think building a moat in the HVAC field to fight against LG Electronics is the main motivation for Samsung Electronics to get involved in this acquisition.
However, the HVAC industry has been growing sluggishly in recent years, with limited profit contribution. In addition, Johnson Controls has frequently raised prices for its air conditioning business in recent years to increase output value, so its valuation is already high. A rough estimate is that the valuation of this business will not be less than US$7 billion.
Considering the current size of LG air conditioners, Samsung Electronics’s payment to take over is tantamount to spending a lot of money to buy a second-hand cannon to shoot a sheep. How much this willingness is is worth discussing.
Bosch Group
I think Bosch Group is the most motivated of the three bidders.
In 2023, Bosch Group’s global sales were 91.6 billion euros, ranking 118th in the Fortune Global 500.
Energy and Building Technology, one of its four major business segments, had sales of 7.6 billion euros in 2023, a growth rate of 9%, and a group contribution rate of 8.3%.
The business of this segment includes systems for video surveillance, intrusion, fire, and voice alarm systems, systems for access control, and professional audio and conference systems.
Bosch Thermodynamics, which is involved in the HVAC field, also belongs to this. Its business mainly involves heating, air conditioning, hot water preparation, and building energy management in residential and factory fields.
If you look carefully, you will find that this business segment is exactly the same as Johnson Controls – the former is simply an enhanced version of the latter.
Just as Johnson Controls chose to acquire it, Bosch Group also has an urgent need to complete the cold and heat sources and ventilation and purification puzzles in smart building solutions. The most scarce one at present is the cold source.
In fact, Bosch Group has also made efforts in this regard.
For example: self-developed multi-link and air source heat pumps, but no one is interested. Another example is the acquisition of Climatec in 2015 to make up for the shortcomings in the solution. However, Climatec and York International are not at the same level in cooling, and in terms of actual results, this effort seems to be a drop in the bucket.
At present, whether it is the group’s strength and operational capabilities, or the business fit and the subsequent benefits that may be generated, Bosch Group is the only choice to take over this business.
Lennox International
The more reasonable explanation for why Lennox would get involved in this matter is that it was more like Johnson Controls pulling in to raise the price or one of the other two companies asking it to bid alongside others.
First, the volume is limited and JC can’t be swallowed.
Data shows that Lennox International’s total revenue in 2023 is 4.982 billion US dollars, and its market value is about 17.7 billion US dollars. The scale of HVAC in the United States in 2023 is 37.656 billion US dollars, of which Johnson Controls accounts for 12.84%, with sales of about 4.84 billion US dollars.
Johnson Controls can beat Lennox in sales in the United States alone. Even if this transaction is sold at the original price, it is as high as about 7 billion US dollars, and Lennox alone may not be able to swallow it.
Secondly, the product structure is perfect and the reputation is good.
Lennox air conditioning business is divided into three parts: residential heating and cooling, commercial heating and cooling, and refrigeration, which are aimed at home, business, and industry, and have a high degree of overlap with York’s international business system.
In addition, Lennox air conditioning has always had a good reputation in North America, and has been on the list of “America’s Most Trusted HVAC” for many consecutive years and ranked at the top. York air conditioning has always been hovering at the bottom of the list.
Third, the business philosophy is conservative.
Lennox was founded in 1895 and entered the HVAC industry in 1955. Since then, it has been rooted in this field and has not expanded to other fields.
It has always focused on the North American market and has tried to expand globally before but with little success. In the past two years, it has begun to shrink and divest its business outside North America: in August 2023, it sold its German business unit to Glen Dimplex Group; in September, it sold its European commercial HVAC and refrigeration business to Syntagma Capital.
I think it is too abnormal and a bit unreasonable to ask a company that only wants to cultivate its own piece of land to acquire a business that is larger than itself.
In the end, Bosch won. Combining this news with other public information, there are three details that we should pay special attention to.
Detail 1: York’s industrial refrigeration business was not included in the acquisition
At present, York International controls York Air Conditioning, whose business includes HVAC and industrial refrigeration. Its HVAC business can be further divided into household, light commercial, and industrial chillers.
Among them: household products refer to air-cooled heat pump units with a single cooling capacity of less than 40kW (small household water units);
Light commercial refers to air-cooled units (air-cooled module units, large air-cooled scroll units, etc.) and chillers (water-cooled scroll, water-cooled screw, etc.) with a single cooling capacity of less than 1800kW and medium energy efficiency.
These two businesses are exactly the “home and light commercial HVAC business” mentioned in the Bosch Group’s announcement, while the two businesses of industrial chillers and industrial refrigeration did not appear in the acquisition.
In terms of output value and market share alone, industrial chillers and industrial refrigeration are the highlights of York International’s business, with annual output value accounting for about 70% of the entire brand. The industrial refrigeration business is the jewel in the crown of York International’s business, with high technical content, high market share, and good profits.
In short, York International’s low-value and low-tech home and light commercial businesses have been divested and taken over by the Bosch Group.
The high-value and high-profit industrial chillers and industrial refrigeration are still controlled by Johnson Controls. It is not yet known whether it will continue to hold or find a buyer in the future.
Detail 2: No mention of York Air Conditioning in the Chinese market
According to the announcement of “Bosch Information Assistant” on June 23, the brands acquired by Bosch Group this time include York and Coleman in the US market and Hitachi in the Asian market.
According to relevant information from “Johnson Controls”, the business sold this time mainly includes engineering and manufacturing direct expansion heating and cooling technology, air conditioners, heat pumps, coils, furnaces/air handlers and complete sets of equipment, etc., and this business is also mainly used in the North American residential market and commercial applications.
Careful people will find that both Bosch Group and Johnson Controls have stated that York in the US market has been sold, but York in the Chinese market has not been mentioned yet.
In short, the ownership and operation of York air conditioners in the Chinese market are still unclear.
In China, York air conditioning business is carried by York (China) Trading Co., Ltd., and production is mainly undertaken by York (Wuxi) Air Conditioning and Refrigeration Equipment Co., Ltd. (large units) and York Guangzhou Air Conditioning and Refrigeration Equipment Co., Ltd. (home and light commercial units).
Detail 3: Johnson Controls-Hitachi Air Conditioning Partly Operates Independently
In 2015, Johnson Controls acquired 60% of Hitachi Air Conditioning’s global air conditioning business (excluding Hitachi’s local air conditioning business) and then established a joint venture company Johnson Controls-Hitachi Air Conditioning (abbreviated as JCH).
In this joint venture, Johnson Controls holds 60% of the shares and Hitachi (Hitachi Global Living Solutions, HGLS) holds 40%. After the transaction is completed, Johnson Controls-Hitachi Air Conditioning (JCH) may be changed to “Bosch-Hitachi Air Conditioning”.
As part of this acquisition change, the JCH manufacturing plant in Shimizu, Japan will be wholly owned and operated by HGLS independently of Bosch.
Conclusion
The cooling and heating sources of air conditioners are “a core part of building smart building solutions, with the miraculous effect of ‘summoning a dragon’.”
Here is another prediction:
In the near future, Johnson Controls’ market share, especially its share in commercial projects, will be eroded. Bosch Group, Siemens, Honeywell, and other companies will not show mercy and will most likely encircle and suppress it on a global scale.
I hope Johnson Controls can withstand the offensive of other companies.
