By Nathan Gomes, Kannaki Deka and David Carnevali
(Reuters) - Emerson (NYSE:EMR) Electric Co will sell a majority stake in its climate technologies unit to Blackstone (NYSE:BX) Inc in a deal that values the business at $14 billion, as the U.S. industrial firm pivots to supplying to a booming automation market.
The company will receive an upfront payment of about $9.5 billion, it said on Monday, which it will use to scoop up more firms, especially in the automation segment.
Emerson's shares edged up 1% in a weak broader market as the company also beat fourth-quarter earnings and revenue.
Businesses are accelerating their efforts to automate their operations amid a shortage of factory workers, and Emerson has doubled down on its software strategy to capture that shift.
The company sold its division that makes waste disposal equipment and hot water dispensers to Whirlpool Corp (NYSE:WHR) and merged its software units with smaller rival Aspen Technology (NASDAQ:AZPN).
GRAPHIC: Emerson vs S&P 500 https://graphics.reuters.com/EMERSON-STAKE/mopakmdlapa/EMR%20YTD%20shr%20graphic.png
Emerson, which will retain about 45% stake in the climate tech unit, said Blackstone and co-investors Abu Dhabi Investment Authority and Singapore state fund GIC would contribute $4.4 billion in equity toward the deal, which would be supplemented by $5.5 billion of debt financing. The debt will be equivalent to about four times the new company's annual cash flow.
"(Emerson) is significantly re-orienting its portfolio to result in a more focused and potentially higher growth enterprise," Citi Research analysts said.
The deal, expected to close in the first half of 2023, is the latest in a flurry of private equity transactions this year as a selloff in equities on recession worries hammered valuations.
The Climate Technologies business, which will be structured as a joint venture, generated net sales of $5 billion in fiscal 2022.
The deal values the unit at 12.7 times its cash flow in fiscal 2022, a premium to peers such as manufacturers of components and industrial companies that own HVAC businesses, which trade at roughly 10.5 and 11.5 times, respectively.
"The business is poised for accelerated growth as it leads the way in helping consumers and businesses shift to more energy-efficient heating and cooling products as part of their carbon reduction efforts," global head of Blackstone Private Equity Joe Baratta said.
Emerson said it plans to use proceeds from the deal to invest in automation-related businesses and spend around $2 billion on share repurchases in 2023.
Centerview Partners LLC and Goldman Sachs (NYSE:GS) are financial advisers to Emerson, while Barclays (LON:BARC) is the lead financial adviser to Blackstone.