Carrier: Announces Viessmann Acquisition and Fire and Security and Refrigeration Divestitures

After the April 25 market close, Carrier Global CARR confirmed that it will acquire Germany-based Viessmann Climate Solutions and divest most of its fire and security and commercial refrigeration businesses. The Wall Street Journal’s April 24 report of the imminent Viessmann acquisition sent Carrier’s stock 7% lower that day as the market was likely uncomfortable with the deal’s size (EUR 12 billion), valuation (17 times 2023 EBITDA excluding synergies), and timing (ahead of a potential recession).

Viessmann Climate Solutions is the largest segment of family-owned Viessmann Group, which manufactures and sells climate control (heat pumps and boilers) and energy generation and storage (solar photovoltaic and batteries) products and services. Before the acquisition, Carrier claimed to have the largest share of the commercial heat pump market in Europe. This purchase will bolster that position and expand the company’s distribution footprint in a growing market.

We see a pathway for this deal to at least be valuation neutral, but, in our view, there is little room for error. Based on our initial discounted cash flow work (and assuming similar capital expenditures and working capital requirements as Carrier), we think over the next five years, Viessmann will need to deliver at least mid-single-digit revenue growth, expand EBITDA margins to above 20% (from 17.5% in 2023), and fetch an implied exit multiple of at least 12 times EBITDA to justify the purchase price. We’re giving Carrier the benefit of the doubt for now, and we don’t expect to immediately adjust our fair value estimate for the Viessmann acquisition. Nor do we plan to change our narrow moat rating. However, we may revisit our valuation assumptions as we learn more about the business.

See our April 11 analyst note for our reaction to a possible fire and security divestiture. The genesis of this divestiture is now very clear to us: Carrier will need the sale proceeds to more quickly rightsize its balance sheet.