Tuesday, September 5, 2017

United Technologies’s Big Bet Leaves Investors on the Runway: UT’s deal to buy Rockwell Collins would create an airplane parts supermarket, but benefits to shareholders aren’t clear



The Wall Street Journal
By Alex Frangos
Sept. 5, 2017 12:26 p.m. ET


United Technologies is building an aerospace supermarket. The question is whether anyone needs one.

By buying Rockwell Collins, United Technologies’s aerospace and jet-engine divisions will become a virtual one-stop shop for building an airplane, producing engines, cockpit gear, seats, toilets, auxiliary power units and landing gear. The company speaks about linking these systems to create “connected airplanes,” though airplanes are already among the most connected devices on the planet. Dividends from further technological leaps would seem to be some way down the road.

Investors should worry that the bigger rationales for the deal are defensive. Becoming a nose-to-tail provisioner of airplane parts gives United Technologies added heft vis-à-vis its biggest customers, Airbus and Boeing . It is an irony that United Technologies rebuffed a 2016 approach by Honeywell , partly on the grounds such a big supplier would upset relationships with those same customers. Bulking up, including raising $14 billion in debt, could be a way to forestall Honeywell trying again and keeps attention away from the company’s slower-growing Otis Elevator and Carrier air conditioning units.

The benefits for shareholders are less clear. United Technologies is paying $30 billion including debt, almost 17 times Rockwell’s trailing earnings before interest, tax, depreciation and amortization when including the operations of B/E Aerospace, which it acquired earlier this year. That deal was for less than 14 times, a price many investors thought was expensive.

The pretax cost savings target of $500 million in four years, taxed and capitalized, would almost justify the roughly 30% premium United Technologies is paying over where Rockwell traded in the two months before news of the deal leaked in early August. Trouble is, some of that savings actually counts the $160 million Rockwell hoped to get with its ongoing integration of B/E Aerospace. Assuming $60 million of that is achieved before this larger deal closes, then United Technologies’s forecast of 6% savings on Rockwell’s sales shrinks to a less salubrious 5%.

United Technologies boss Gregory Hayes reiterated Tuesday that he thinks his company’s shares trade below their intrinsic value. Yet he is using them as currency for the part of the deal not paid in cash, while the company is canceling its buyback program for the next few years. United Technologies shares, already badly trailing the market, fell 4% Tuesday. They suddenly have a new load keeping them down.

Original article can be found here ➤ https://www.wsj.com

2 comments:

Anonymous said...

Love the use of the word "investors". Most of these folks who trade stocks are investors in the same way that folks at the race track betting window are "investors" in the horses. Passive bettors, at best, and many of them use bookies, er, I mean mutual funds for their "investing".

Anonymous said...

Your comment is asinine and incoherent. Do you actually believe that someone who owns stock in a company is not properly labeled an "investor?" Your racetrack analogy is silly and totally inapposite, inasmuch as a bettor on horses is not receiving any share of the horse's prize winnings, as a part-owner of the horse at issue (i.e., an actual "investor") would properly be entitled to.

Receiving quarterly (or, in some cases, monthly) dividend income and voting rights is the proof of the investor's fractional ownership. That steady and rising (over time) cash flow via dividend income has sustained and aided millions of Americans in retirement. So, again, your cynical posture is unwarranted.

You seem to be exceptionally and irrationally embittered towards the concept of investing, John. Perhaps you can share with the rest of us the source of the trauma that gave rise to your bitterness. Otherwise, your comment is just so much worthless prattle.