After word of the deal began leaking earlier this week, United Technologies [UTX] on Wednesday night said it has agreed to acquire aerospace and defense company Goodrich Corp. [GR] for $127.50 a share in cash, representing an enterprise value of $18.4 billion that includes $1.9 billion in assumed debt.
About 70 percent of Goodrich’s $8 billion in sales are in the aerospace sector, which UTC officials said yesterday is in the early stages of an “up-cycle” that has long-term potential supported by economic growth in emerging markets.
“I’m bullish on aerospace and the whole team is bullish on aerospace,” Louis Chenevert, UTC’s chairman and CEO, said yesterday on an investor call. “It’s one of the few areas with a brighter outlook today.”
Goodrich provides systems to a number of new and next-generation commercial aircraft, including the Boeing [BA] 787 and 737 Next-Generation, and the Airbus A350 and A380.
The defense and space market makes up about 30 percent of Goodrich’s sales. UTC officials said they are not overly concerned that the constrained outlook for defense spending will crimp this component of the pending acquisition because of Goodrich’s position in the intelligence, surveillance and reconnaissance systems that remain in demand.
The acquisition is expected to close by the end of the second quarter of 2012 or sometime in the third quarter. Once it does, UTC will form a new division called Aerospace Systems that will consist of Hamilton Sundstrand and Goodrich.
The acquisition will be financed through a combination of debt and equity, and as of now UTC believes the split will be 75 percent and 25 percent, respectively.
In the second year of the combination, the company believes it will be solidly accretive to its earnings. That’s when cost synergies begin to kick in. By year five of the merger, UTC said its conservative estimate of annual cost savings synergies will between $350 million and $400 million, stemming from lower administrative costs, facilities rationalization, supply chain efficiencies and low cost sourcing of materials.
Nearer term, UTC said there will be a one-time $500 million loss associated with the purchase.
With the additional debt it will be taking on to help fund the deal, UTC plans to work to maintain its credit rating by suspending its stock repurchase program through 2012 and likely cut the program in half in 2013 and 2014 to about $1 billion each year, Greg Hayes, UTC’s chief financial officer, said on the call. And, for the next two years, UTC is going to reduce its $2 billion annual placeholder for acquisitions and reduce it to $1 billion, he said.
In addition to cost savings from the merger, UTC said there is upside from sales synergies, although it provided no estimate. The upside here stems from more integrated system offerings and leveraging their respective aftermarket networks, the company said.
Both UTC, through its Hamilton Sundstrand and Pratt and Whitney segments, and Goodrich provide commercial airframe builders with a slew of systems and subsystems. UTC officials said that for the most part the commercial aerospace offerings of the two companies are complementary and they expect regulators in the United States and overseas to back the deal.
Hamilton Sundstrand develops and produces auxiliary and electrical power systems, environmental control systems, engine controllers and gearboxes, flight and cockpit controls and more for commercial aircraft. Goodrich develops and produces cargo systems, exterior lighting, air data, sensors and systems, landing gear, wheels and brakes, actuation flight controls and engine bleed systems, engine nacelles and thrust reversers, and more for commercial aircraft.
Chenevert said that the capabilities of the two companies in commercial aerospace will be combined into more integrated customer offerings that will reduce costs and improve efficiencies. UTC said they expect to offer more integrated electric braking systems, vehicle health monitoring systems and propulsion systems. UTC’s Pratt & Whitney division makes engines for commercial and military aircraft.
Of Goodrich’s defense business, Marshall Larsen, the company’s chairman, president and CEO, said it is broad and not dependent on a single program or two. Through the first half of 2011, organic revenues in the defense and space business are up 8 percent, he said.
In the defense and space sector, Goodrich has a core business around electro-optic surveillance systems, precision guidance, helicopter programs, and the new F-35 Joint Strike Fighter, all areas that Larsen said are “least likely to be impacted” by reduced defense spending.
Another key component to the defense business is the “meaningful” aftermarket sales it will be generating for the “foreseeable future,” Larsen said.
Indeed, Larsen and Chenevert both touted their companies’ strong aftermarket sales, which account for more than 40 percent of revenues at both firms, and the expectations for growth here.
UTC maintained its financial outlook for 2011 with sales of about $58 billion and earnings per share between $5.35 and $5.45. Combined with Goodrich, sales are expected to be around $66 billion, with an expanded position in commercial and military aerospace.
UTC’s financial advisers on the deal are J.P. Morgan and Goldman, Sachs & Co., while Goodrich’s advisers are Credit Suisse and Citi.