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Honeywell Steps into Smart Grid Fray with Elster Acquisition

Neil Strother — July 29, 2015

Honeywell’s purchase of smart meter maker Elster is a sign that the smart metering business still has some attractive runway for companies willing to endure the somewhat lengthy procurement process of utilities. The $5.1 billion deal gives Honeywell a solid global competitor for the next wave of smart grid investments.

The Deal

Honeywell is purchasing Elster from its current owner, Melrose Industries, a British investment firm that specializes in buying manufacturing businesses, turning them around, and selling them for a profit. In this case, Melrose did that after paying approximately $2.3 billion for Elster in 2012, suggesting a profit of nearly $3 billion. Melrose said it generated a 33% internal rate of return in the 3 years since acquiring Elster.

Here is what Honeywell is getting by purchasing Elster: a global manufacturer of gas, electricity, and water meters; communications equipment; and software solutions, including data analytics. It is also taking on about 6,800 employees of Elster, which is based in Mainz-Kastel, Germany. The company has operations in 39 countries, including the United States, the United Kingdom, and Slovakia. Honeywell is also taking on about $1.4 billion in pension liabilities.

Fits with Plans

While this move raises some eyebrows for its premium price, the acquisition fits with Honeywell’s stated plans last year that it would target some $10 billion to buy companies over the next 5 years. And while the smart meter business has slowed, particularly in the United States since federal stimulus money dried up, Elster has been active, picking up business in France as part of ERDF’s deployment of 35 million meters, and scoring a deal with CFE in Mexico earlier this year for about 300,000 meters. In addition, earlier this year, Elster launched an enhanced gird software platform called Connexo that integrates utility workflows, business processes, and grid data from multiple devices and vendors into a unified solution. According to Honeywell, Elster is attractive for several reasons: its high- and low-temperature burner products and residential heating components complement Honeywell’s existing business within its Environmental Combustion and Controls group; Elster’s presence in high-growth regions aligns with Honeywell’s strategy; and the existing Elster customer base presents an opportunity to cross-sell legacy products.

For Elster and its employees, the deal makes sense. Honeywell already has some synergies in the gas sector, and is no stranger to the way the utility industry operates. Elster’s electricity and water businesses give Honeywell a broader set of technologies it can leverage as those sectors grow in ways different from gas. Nonetheless, Honeywell will be facing some experienced meter manufacturers. Companies like Landis+Gyr, Itron, and General Electric are formidable global players, not to mention lesser known Chinese manufacturers, such as Holley Metering, that want to move beyond their domestic markets.  By acquiring Elster, Honeywell has the vehicle to be competitive now, and with skill can stay among the leaders as the market evolves.

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