A Pratt & Whitney jet engine made by United Technologies
Photograph by Bloomberg via Getty Images

Huge aerospace deal has skeptics.

By Reuters
September 5, 2017

Aerospace and industrial company United Technologies defended its $23 billion acquisition of avionics maker Rockwell Collins on Tuesday, saying it would yield cost savings and not force it into quick sales of other big businesses.

United Tech’s stock fell 4.5% as some analysts downgraded the company, citing its decision to halt share buybacks for three to four years and dilution from the cash-and-stock deal.

United Tech knocked down speculation that the purchase – the largest in aerospace history – would prompt it to spin off its Carrier air conditioner or Otis elevator units, saying it needs their cash flow to help pay down debt from the deal.

But CEO Greg Hayes did not rule out such sales in the longer term. “After the deal is done, and after we pay down some debt, we’re going to go back and look,” he said.

If the company’s share price does not reflect its value, he said, “we’ll need to do something.”

United Tech could sell “non-core pieces” such as home security in the meantime, Hayes said. But given taxes and lost earnings, “it’s hard to make financial sense out of those transactions” unless they fetch a high price, he said.

Rockwell’s shares col rose 0.6% to $131.41 in morning trading. United Tech shares, part of the Dow Jones industrial average, fell 4.7% to $112.39.

“We see limited upside near term as share repurchase is withdrawn and deal timing becomes an investor focus,” analyst Jeff Sprague at Vertical Research Partners said in a note.

United Tech had planned $2 billion in buybacks in the second half of 2017, he said.

Hayes assures Airbus

The acquisition, announced on Monday, would create a major supplier to Boeing, Airbus, and Bombardier at a time when the plane makers are pressing for price cuts and trying to compete against suppliers on services and spare parts.

It also marks the rise of a second engines-to-seating supplier, after jet-engine maker Safran’s pending $7.7-billion deal to buy seat maker Zodiac Aerospace. Safran said Tuesday it would look at assets that might come up for sale after the United Tech-Rockwell deal.

United Tech’s engines and systems portfolio has little overlap with the avionics, seats and interiors businesses of Rockwell, which Hayes said should mean little trouble during the necessary regulatory review.

Hayes said he had assured Airbus CEO Tom Enders that the Pratt & Whitney engine division will stay focused on delivering between 350 and 400 jetliner engines this year. Airbus had raised concern about the Rockwell acquisition last week, and Boeing has been known to oppose deals if suppliers gain too much power or risk losing focus.

“Pratt has nothing to do with this deal,” Hayes said. “They won’t be part of the integration efforts” combining United Tech’s separate aerospace unit with Rockwell Collins to create Collins Aerospace.

Boeing said it will take “a hard look” at the deal and is “skeptical” the deal would add value to its customers.

United Tech expects to borrow $15 billion and will assume $7 billion in Rockwell debt to fund the deal, which is expected to close by the third quarter of 2018.

United Tech said the acquisition would add to earnings in its first full year and yield at least $500 million in cost savings by the fourth year of operation.

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