Monday, August 07, 2017

United Technologies-Rockwell Collins Deal Too Expensive to Fly: United Technologies shareholders should hope pricey deal talk passes quietly into the night

A circuit board used in a liquid crystal display screen for Boeing Co. aircraft sits on a workstation at the Rockwell Collins Inc. production facility in Manchester, Iowa. 

The Wall Street Journal
By Alex Frangos
Aug. 7, 2017 12:50 p.m. ET

United Technologies may aspire to be even bigger in aerospace than it already is. Its shareholders should be wary of that happening at the wrong price.

Shares in avionics and airplane interiors maker Rockwell Collins surged Monday following reports that industrial conglomerate United Technologies approached the company about a takeover. The companies were mum, but such a deal could be worth in excess of $20 billion.

With little product overlap, combining the two would seem doable from a regulatory perspective. United Technologies views aerospace as its fastest-growing area and it might covet Rockwell Collins’s high-margin cockpit gizmos business. It also would inherit that company’s airplane interiors unit, which Rockwell still is digesting following a $6.4 billion acquisition of B/E Aerospace that closed in April.

Imagine then a plane made with United Technologies’ Pratt & Whitney engines, United Technologies landing gear and brakes, Rockwell Collins flight controls, drink carts, seats and toilets. If you are Boeing or Airbus , or an airline purchasing the finished product, you might think that the balance of power in the aerospace supply chain is tilting against you.

And they would be right on a certain level. Boeing’s recent initiative to branch into avionics is a way to exert pressure back on its suppliers. The response by suppliers can be to join together and hold more of the cards in their relationship with the oligopolistic aircraft makers.

But such a combination, precisely because there aren’t overlapping product areas or economies of scale, would have high execution risk. Adding products also would fan the flames of the undying debate over whether a company should exist that makes such varied products as elevators, air conditioners and jet engines. If a deal happened, United Technologies would derive 58% of its sales from aerospace in 2019, its highest in over a decade, according to J.P. Morgan analysts. Shareholder pressure to spin off some part of the company could increase.

Ultimately, the problem will be price. United Technologies has space on its balance sheet with net debt of just 1.7 times its earnings before interest, taxes, depreciation and amortization, according to S&P Global Market Intelligence. That is all the more reason for shareholders to worry. Rockwell Collins shareholders would require a hefty takeover premium given the company’s margins, which are substantially higher than that of United Technologies.

Without a firm deal in hand, Rockwell Collins already trades at a debt-adjusted market value of 20 times trailing Ebitda. The Wall Street Journal reported a price below $140, which would bring the ratio to more than 22 times. Rockwell Collins itself paid 13 times for B/E Aerospace. Berkshire Hathaway paid around 12 times for Precision Castparts in 2015.

United Technologies shareholders should hope such pricey deal talk passes quietly into the night.

Original article can be found here ➤

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