United Technologies Corp. [UTX] on Monday evening said it has agreed to acquire Rockwell Collins [COL] in a $30 billion deal that will create a $23 billion aerospace systems division, with about 75 percent of the business focused on commercial aerospace and the rest serving military customers.
The announcement wasn’t a surprise given media reports about it going back weeks. UTC is paying $140 per share for Rockwell Collins, two-thirds in cash and the rest in stock, adding up to $23 billion. The company will also assume about $7 billion in net debt once it acquires Rockwell Collins.
The 25 percent of military sales in combined UTC Aerospace Systems (UTAS) segment and Rockwell Collins equates to $4.6 billion in estimated pro forma 2017 revenue based on expectations for both companies this year. Once the deal closes, the new operating segment will be called Collins Aerospace Systems and will be led by Kelly Ortberg, chairman, president and CEO of Rockwell Collins, as CEO. Dave Gitlin, who currently leads UTAS, will become president and chief operating officer of the segment.
The new business segment doesn’t include Pratt & Whitney, UTC’s aircraft engine making segment that serves the commercial and military markets. Pratt & Whitney had $14.9 billion in sales last year, with more than half the revenue from commercial business.
Rockwell Collins is expected to do more than $8 billion in sales this year across four segments, the largest being aircraft interiors, a business acquired earlier this year with the purchase of B/E Aerospace, followed by a segment that supplies various electronic systems for commercial and business jet aircraft, a government business that supplies electronics to military aircraft and for other defense systems, and an information systems business that supplies to airlines, airports and governments.
Once the acquisition closes, which is expected in nine months to a year, UTC’s aerospace businesses, including Pratt & Whitney, will supply a wide range of products for aircraft, including engines and engine systems, environmental systems, actuation systems and propellers, nacelles, landing systems, sensors and other electronic systems, information solutions, avionics, seating and interior systems.
Greg Hayes, chairman and CEO of UTC, on Tuesday said on an analyst call there is only about $200 million in overlap between the two companies, which means there isn’t much risk for required divestitures to obtain regulatory approvals.
Hayes said the acquisition is “transformative” and said it will help UTC better meet evolving customer requirements, adding that it gives the company the scale to better innovate, provide more integrated solutions, and reduce costs.
Both companies supply to commercial aircraft makers, including Airbus, Boeing [BA] and others. Boeing responded to the announcement with skepticism saying it will closely review the deal.
“Until we receive more details, we are skeptical that it would be in the best interest of—or add value to—our customers and industry,” Boeing said in a statement. “Our interests and those of our customers, employees, other suppliers and shareholder are in ensuring the long-term health and competitiveness of the aerospace industry supply chain. Should we determine that this deal is inconsistent with those interests, we would intend to exercise our contractual rights and pursue the appropriate regulatory options to protect our interests. “Also, both companies are significant suppliers to Boeing and other OEMs, and at a time of record industry production, their first priority should be delivering on existing cost, schedule and quality commitments for their customers and ours.”
UTC said the deal will create more than $500 million in annual cost saving synergies four years after it closes. Hayes said the planned savings are beyond what UTC expects in terms of cost reductions its customers will expect from the combination.
Hayes also pointed out that with the small amount of overlap between the two companies, the deal isn’t consolidating products so no competition is being eliminated. Rather, he said, customers will benefit from more integrated solutions that will result in systems weighing less and lower costs.
The commercial aerospace market is becoming more competitive, Hayes said, but the outlook for the next 10 to 20 years is continued growth.
Once the deal closes, UTC said its priorities for cash will be organic growth, followed by dividends with no changes expected, paying down debt to maintain a strong credit rating and limited acquisitions. To preserve cash, it expects to stop buying back its shares for three to four years, including about $2 billion previously committed to the repurchase program. Cash repatriation and divestitures of non-core assets are also on the table.
UTC expects the acquisition to be accretive to earnings one year after it closes. The company maintained its guidance for this year with adjusted earnings between $6.45 and $6.60 per share and sales between $58.5 billion and $59.5 billion. Combined with Rockwell Collins, UTC would expect to have $67 billion to $68 billion in pro forma sales this year.
Howard Rubel, an aerospace and defense analyst with Jefferies, said in a note to clients on Tuesday that the earnings benefits from the deal “will take time to show.” He also said that UTC needs to clarify cash flow uses around internal performance, highlighting execution its geared turbofan engine and “demonstrating how UTAS will improve its performance.”