Buyout to create aviation colossus

United Technologies Corp. agreed to buy Rockwell Collins Inc. for about $23 billion, creating an aerospace behemoth that can outfit jetliners and warplanes from tip to tail.

The deal, one of the biggest in aviation history, creates an aircraft-parts giant better positioned to withstand the squeeze from plane-makers Boeing Co. and Airbus SE for pricing discounts and higher output. The company will boast a broad suite of products for airplanes, from Rockwell Collins’ touch-screen cockpit displays to United Technologies’ Pratt & Whitney jet engines.

“The combination gives us the ability to both scale and innovate,” Greg Hayes, chief executive officer of United Technologies, told analysts during a conference call Tuesday, a day after the deal was announced. “This will be good for our customers, it will be good for the industry because it gives us the scale to do things we couldn’t do on our own.”

Rockwell Collins shareholders will receive $140 a share in cash and stock, the companies said in a statement Monday after weeks of behind-the-scenes negotiations. The price represents an 18 percent premium to Rockwell Collins’s closing level on Aug. 4, before Bloomberg News reported on the talks.

Investors reacted with caution, pushing United Technologies down $6.71, or 5.7 percent, to close Tuesday at $111.21, while Rockwell Collins climbed 39 cents to $131.

United Technologies said it plans to finance the cash portion of the deal with about $14 billion of new debt. Moody’s Investors Service placed the company’s ratings on review for downgrade, saying United Technologies may have to increase its “reliance on inherently uncertain earnings growth to moderate leverage.” Moody’s currently posts an A3 senior unsecured debt rating and Baa1 junior subordinated debt rating for United Technologies.

With the acquisition, valued at $30 billion including the assumption of debt, United Technologies is increasing its bet on commercial-aircraft systems, where it has stumbled recently with the rocky rollout of a new jet engine that cost $10 billion to develop. The aircraft market accounts for about half of sales at the Farmington, Conn.-based manufacturer, with the rest coming from elevators, air conditioners and other building systems.

“This is a significant deal for UTC and the aviation industry in general,” Hans Weber, president of San Diego-based consultancy Tecop International Inc., said in an email. By buying Rockwell Collins, which delivers avionics systems for Boeing’s 787 model, “UTC becomes a critically important supplier to Boeing and will have a strong negotiating position as Boeing is putting price pressure on suppliers.”

United Technologies plans to combine its aerospace business with Rockwell Collins in a new unit named Collins Aerospace Systems. Rockwell Collins CEO Kelly Ortberg will head the division, while Dave Gitlin, who currently runs UTC Aerospace Systems, will serve as president and chief operating officer.

The buyer expects the acquisition to add to adjusted earnings after the first year after closing and generate $500 million or more in annual pretax savings and other benefits by the fourth year. The deal is expected to close by next year’s third quarter, subject to regulatory and shareholder approval, and other customary conditions.

United Technologies opted for a mix of cash and stock with the goal of maintaining a strong credit rating, the company said. Chief Financial Officer Akhil Johri said United Technologies would suspend its share-repurchase plans for the next few years.

Rockwell Collins, based in Cedar Rapids, Iowa, is already absorbing the largest acquisition in its history. The company earlier this year closed the purchase of B/E Aerospace, adding deluxe jetliner seats, lavatories and galley equipment beside a lineup of high-technology avionics products. That deal was valued at $8.6 billion including the assumption of debt.

Consolidation is necessary for the aerospace-parts manufacturers, said Shukor Yusof, founder of aviation consultation Endau Analytics. Given that the industry remains fragmented, the deal isn’t likely to encounter regulatory hurdles, he said.

When Hayes took the United Technologies helm in 2014, he pledged to consider major moves, including deals potentially in excess of $20 billion. The company sold its Sikorsky helicopter business to Lockheed Martin Corp. for $9 billion in 2015. Hayes rejected a merger proposal in early 2016 from Honeywell International Inc., saying he didn’t believe that antitrust regulators would have approved the $90 billion tie-up. Honeywell later abandoned the bid.

Information for this article was contributed by Richard Clough, Julie Johnsson, Dinesh Nair Kyunghee Park and Benjamin Katz of Bloomberg News.

Business on 09/06/2017

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