Picking the Winners of the Honeywell Breakup

**Tyler Crowe** (0:02)
We're talking match ups and break ups 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 long time Fool contributors, Matt Frankel and Luke 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 gonna dive deep into that today. And of course, we're also gonna 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, Jon Quast, the 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. And what I want to do today is we're gonna 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 Carlisle Companies, a building supply company, doing an unsolicited bid for Owens Corning. So not done yet, but looks like something's gonna happen. You've got a materials company, Martin 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?

**Matt Frankel** (1:33)
Yeah, I mean, I like playing the AI boom with stocks that I understand. Like the picks and juggles plays, the infrastructure plays like that of 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 when you combine all of them in three data centers in Northern Virginia for $3.5 billion. $1.2 billion is coming in cash. The other $2.3 billion is the Digital Realty is issuing new shares. They're going to need about $1.4 billion of additional capex to complete the development of these. None of them are occupied or operational yet. Digital Realty is 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

**Tyler Crowe** (2:51)
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?

**Matt Frankel** (3:07)
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, the 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 on them 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 percent 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.

**Lou Whiteman** (3:56)
Yeah, it's funny. I'll take the other side of that trade. The goal of private equity is to be ruthlessly unsentimental, to buy low and sell high. And for Blackstone, they're cashing out on an asset with massive continuing capex at a premium. I get it for digital realty. I'm not saying it's going to be a terrible deal for them. But I'd rather be sitting on Blackstone's side. And I do think that this is what private equity does well. But I don't want to be boring and just focus on one deal. So let's broaden it a bit. Tyler, Carlyle's bid for Owens Corning and then the Martin Marietta deal, too. They both intrigued me because they suggest that there are management teams out there who think it is time to be greedy when others are fearful.