United Technologies to Buy Goodrich for $16.5 Billion as Plane Orders Jump
United Technologies Corp. (UTX) agreed to buy Goodrich Corp. (GR) for $16.5 billion, adding a maker of aircraft landing gear and jet-turbine casings to take advantage of a record surge in commercial plane orders.
The acquisition caps a years-long pursuit by United Technologies, whose aviation brands include Pratt & Whitney jet engines and Sikorsky helicopters. Chief Executive Officer Louis Chenevert plans to fold his Hamilton Sundstrand aviation equipment and Goodrich into UTC Aerospace Systems, based in Goodrich’s hometown of Charlotte, North Carolina.
United Technologies’ bid represents a premium of 47 percent to Goodrich’s closing share price on Sept. 15, the day before talks were reported. Excluding Goodrich, the conglomerate has paid an average premium of 18 percent in almost 30 deals for which terms were disclosed since 2001.
“It certainly is a handsome premium, but I think it’s a great deal on both sides,” said Heidi Wood, a New York-based analyst with Morgan Stanley. “Louis can say, ‘Look, I’ve got engines, I’ve got power systems, I’ve got wheels and brakes. You don’t have to go anywhere else.”
The deal’s enterprise value is $18.4 billion, including $1.9 billion in net debt, the companies said yesterday. Goodrich stockholders will get $127.50 a share as Hartford, Connecticut- based United Technologies finances about 25 percent of the purchase with equity and the rest with new debt.
‘Sacrosanct’ Credit Rating
Share repurchases will be suspended in 2012 and reduced as much as 50 percent in 2013 and 2014, United Technologies executives said on a conference call with analysts and investors.
That will help the company repay most of the $12 billion it expects to borrow within five years, since United Technologies generates more than $5 billion of annual cash flow, Chief Financial Officer Greg Hayes said on the call.
“Keeping the credit rating especially in times like this, I mean it is sacrosanct,” he said. “We knew that we had to do a little bit in terms of equity to hold the rating and we would have to suspend share buyback, but again, the deal makes sense even with the issuance of 25 percent equity. In fact, it makes a heck of a lot of sense.”
Moody’s Investors Service has an A2 credit rating for United Technologies, and Standard & Poor’s rates the debt as A. Both reaffirmed their ratings today, while S&P lowered its outlook to negative from stable.
Without net debt, the price represents a multiple of 11.8 times earnings before interest, taxes, depreciation and amortization, or Ebitda, trailing the median of 12.3 times for aerospace takeovers greater than $500 million in the last five years, according to data compiled by Bloomberg.
Chenevert’s acquisition marks one of the industry’s largest deals and the first big aerospace purchase for United Technologies since the 1999 takeover of Sundstrand Corp. for $4 billion. It’s also the first major deal by Chenevert, 54, who rose to become CEO in 2008 after running Pratt & Whitney.
In businesses such as those run by United Technologies, results are often measured by decades not quarters, Chenevert said in the interview. He cited the $1 billion investment over a decade to develop the geared turbofan engine at Pratt & Whitney and new electrical systems for Boeing Co. (BA)’s 787 Dreamliner.
“As far as the Goodrich property, I mean, it’s the same thing,” he said. “I didn’t pursue Goodrich because it’s good for me in ‘12 or ‘13, I did it because it’s spectacular what it does 10 years out.”
Based on 2011 estimates, the purchase adds sales of about $8 billion a year, boosting revenue to $66 billion for United Technologies, which also makes Sikorsky helicopters and Otis elevators. Goodrich is the world’s largest producer of aircraft landing gear and its lineup includes nacelles, the casings that house jet engines, and de-icing systems used on planes. Marshall Larsen, its CEO, will head UTC Aerospace Systems.
Goodrich surged 11 percent to $120.60 at 4:15 p.m. in New York Stock Exchange composite trading. United Technologies slid $6.56, or 8.8 percent, to $68.31. It closed at $75.61 the day before the deal was reported.
“The transaction may cause other suppliers to consider their strategic options,” Howard Rubel, a Jefferies & Co. analyst in New York, wrote in a note to clients today. “For the moment, we do not anticipate further combinations of similar scale. However, it would not surprise us if moderately sized companies find cause to combine to support or enhance their product lines.”
Adding commercial aerospace revenue would be a boost for United Technologies after Pratt’s geared turbofan engine failed to win placement on Boeing’s upgraded 737, the world’s most widely flown jetliner. The engine, which Chenevert spent more than $1 billion and a decade developing, is a choice on Airbus SAS’s upgraded A320neo family, a 737 rival.
While there is little product overlap between the two companies, United Technologies expects the U.S. Justice department to make what’s called a second request for a detailed review of the transaction, Chenevert said. A small number of product lines may have to be divested. The acquisition should close in the second or third quarter of next year, he said.
“There’s a lot of tough work ahead,” Chenevert said, noting he’s made calls to customers already. “Reaction is very positive. We always focus on them and the value. It’s all in our current track record. They know we’re not going to change. I gave them my personal commitment that they’re my priority one.”
United Technologies agreed to pay Goodrich a breakup fee of $500 million, according to a regulatory filing today.
‘Superb Deal Experience’
United Technologies signaled its interest in a new approach to acquisitions in March, when Chenevert promotedWilliam Brown to lead deals and growth initiatives. Brown previously headed UTC Fire & Security, a role in which he completed more than 40 acquisitions.
“I felt to get a larger transaction done, I needed somebody by my side that had superb deal experience,” Chenevert said today in an interview. “When you do small deals, it kind of happens in the business units. When you get a public company like this one, there’s a lot more complexity to it.”
Only in the last few days did it become clear that the approach was likely to lead to a deal, said a person familiar with the talks.
United Technologies executives had just one day -- Sept. 20 -- with full access to Goodrich’s books, this person said. That night, after the review was complete, Chenevert confirmed he was still committed to the $127.50-a-share price at a dinner with Larsen at the St. Regis Hotel in New York, the person said. Chenevert and his predecessor, George David, have often used the site for delicate negotiations and investor meetings.
Brown’s move into the acquisitions role followed what analysts said were rare missteps by United Technologies, including an approach to automated teller machine-maker Diebold Inc. in February 2008. That offer was rescinded in October of the same year after due-diligence requests were spurned.
Goodrich reported sales of $6.97 billion last year, compared with $54.3 billion for United Technologies. Chenevert’s three aerospace businesses -- Pratt, Sikorsky and Hamilton Sundstrand -- made up $22.23 billion of that total.
JPMorgan Chase & Co. and Goldman Sachs Group Inc. are financial advisers for United Technologies while Wachtell, Lipton, Rosen & Katz are providing legal counsel. Credit Suisse Group AG and Citigroup Inc. are providing financial advice to Goodrich and Jones Day is legal counsel.
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