Picking the Winners of the Honeywell Breakup
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What is the main topic discussed in this episode?
We're talking matchups and breakups today on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors Matt Frankel and Lew Whiteman. So we just got to the end of the Honeywell kind of breakup phase that's been going on for a year. So we're going to dive deep into that today. And of course, we're also going to hit the mailbag like we always do. But we wanted to start today with, you know, it's July 4th weekend coming up and apparently Wall Street bankers want to clear their plates before the July 4th weekend. Because there's been a ton of deals that have happened in the last couple of days. Yesterday, John Quast, host and company, they covered the Comcast split and the Rocket Lab acquisition.
Matt, I think you were part of that discussion there. And since then, we've seen even more deals come through. I've read four of them within the past 24 hours. What I want to do today is we're going to go through all four of them, and then I want you guys to tell me which one of these do you actually like the most. We had Digital Realty buying data centers from Blackstone for about $3.5 billion. We have Carlyle Companies, a building supply company, doing an unsolicited bid for Owens Corning. So not done yet, but looks like something's going to happen. You've got a materials company, Martin Mariano.
What prompted the Honeywell breakup and its significance?
Marietta Minerals buying a limestone supplier for $13.5 billion. And then On Semiconductor is buying Synaptics for about $7 billion. So, Matt, I feel like somebody who loves REITs is going to go in a certain direction here. Am I right?
Yeah, I mean, I like playing the AI boom with stocks that I understand, like the picks and shovels plays, the infrastructure plays, like data center REITs. Digital Realty has been probably one of the top two or three longest running dividend stocks in my portfolio. The deal is interesting to me. The stock is down 5% after the deal. The company is purchasing Blackstone's roughly two-thirds interest rate. when you combine all of them in three data centers in Northern Virginia for $3.5 billion.
What recent deals are impacting the market landscape?
$1.2 billion is coming in cash. The other $2.3 billion, Digital Realty is issuing new shares. They're gonna need about $1.4 billion of additional CapEx to complete the development of these. None of them are occupied or operational yet. And Digital Realty's assuming some debt as part of the deal as well. So they were already the minority owner of these three properties, just to be clear. They're just buying out Blackstone's majority stake. All three of them are already 100% leased to hyperscalers on 15-year deals with 3.6% annual rent escalators. So it should help the company more than keep up with inflation when it comes to their rent. Two of them are supposed to be occupied and stabilized in the first half of next year, the third in the first half of 2028.
Matt, you're making a pretty compelling case here, but the market doesn't seem to agree because the stock's down about 5% as we're recording. So why do you think the market may be a little less as on board with this idea as you are?
Yeah, and it's a good question. There are a few different reasons why. So, I mean, for one, digital realty says this is going to be a creative to FFO, which is funds from operations to real estate version of earnings, but not until these properties are fully occupied and stabilized, which won't happen for a while. In the near term, it's probably going to hurt the earnings numbers. Plus, as I mentioned, they're selling $2.3 billion of new stock. And not only that, but Blackstone's selling $2.3 billion of its own digital realty stake. So it's a dilutive deal. You're going to see a lot of stock hit the market at the same time. The FFO benefit is delayed. It's a fair price. It's a cap rate of 6.5% in real estate, which is, that's okay.
It's a fair price. It's not a bargain for top quality assets. And like I said, it's going to hurt the numbers in the near term. So it's not a perfect deal, but long-term, I like the strategy here.
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:02–1:16
2
What prompted the Honeywell breakup and its significance?
1:16–2:04
3
What recent deals are impacting the market landscape?
2:04–4:09
4
How does Digital Realty's acquisition affect the data center market?
4:09–25:25
5
Why are building materials companies consolidating now?
25:25–25:41