Selling Rockwell Collins Inc. is easier said than done.
The avionics-equipment maker is getting pushback over its planned $8.3 billion takeover of B/E Aerospace Inc. from activist investor Starboard Value and other large holders, who want Rockwell Collins to sell itself instead.
The B/E Aerospace deal requires some creative thinking and a bit of faith to understand the appeal. The companies don't have much overlap so the acquisition is really about tapping into demand for more comfortable, connected airplane cabins and realizing the benefits of greater scale as Airbus Group SE and Boeing Co. push for lower prices. It will ultimately generate growth for Rockwell Collins, but it's also an expensive bet at a time when the commercial market is preparing for sales to wind down. The shareholder payoff will certainly take longer to materialize than the quick satisfaction of a takeover pop.
But the thing is, you have to actually get that juicy acquisition offer. As of now, there don't appear to have been any approaches and Rockwell Collins's management may not even want to sell, whatever some shareholders say.
Rockwell Collins has been talked about as a potential target for years. Some analysts thought that United Technologies Corp. should have bought the company instead of airplane-landing gear maker Goodrich back in 2012 and speculation has continued to bubble up about a United Technologies-Rockwell Collins deal since then. Such a combination would make a lot of sense, but if United Technologies CEO Greg Hayes wanted to buy Rockwell Collins, he didn't need this Starboard intervention to do so -- no offense to Jeff Smith.
The reality is that Rockwell Collins is expensive. After jumping as much as 3.9 percent on Thursday, the aerospace supplier is within striking distance of its record price of about $99. It's valued at about 10.4 times its projected Ebitda for fiscal 2017, compared with a multiple of about 9.9 at United Technologies. And mind you, that's before any premium. Hayes has signaled a willingness to look at M&A opportunities when they arise, but he's pointed to smaller deals as the company's likely sweet spot. Executives have often said that United Technologies' stock is undervalued and they would rather buy it back than use it as acquisition currency. In that light, it would be hard to defend a pricey Rockwell Collins takeout.
Other companies that are often bandied about as potential Rockwell Collins acquirers are General Electric Co. and Honeywell International Inc. Who knows, they could lob in offers. Both companies have been focused on building out their connectivity and software offerings and a takeover of Rockwell Collins would fit within that goal. But Honeywell CEO Dave Cote is about to hand the reins over to Chief Operating Officer Darius Adamczyk, so the timing would be a bit weird. The last time Cote tried to veer from his tried-and-true strategy of small and easily integrated deals with a jumbo-sized $100 billion-plus bid for United Technologies, investors freaked out. I'm not sure a pricey Rockwell Collins bid would go over much better.
GE's Jeff Immelt is perhaps more of a wild card. He certainly has the ammunition for a large deal after divesting the bulk of GE's finance operations and its appliances unit. But Immelt has also been a bit busy of late, what with those divestitures, a combination of its energy business with Baker Hughes Inc. and several software and 3-D printing purchases.
With any of these possible buyers, though, regulatory approval for a Rockwell Collins takeover isn’t guaranteed. Airbus and Boeing would likely have something to say about their major suppliers getting even bigger just as they're trying to press for cost cuts.
In other words, yes, a B/E Aerospace deal is a bit risky, but hunting for a Rockwell Collins buyer is risky, too. Given the odds, sticking with the B/E Aerospace deal may actually be the better option.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Rockwell Collins and B/E Aerospace are targeting $160 million in pretax cost savings. Compare that to the $600 million of synergies that United Technologies eventually achieved from its 2012 purchase of Goodrich. But low fuel prices have driven airlines to record profitability, giving them flexibility to refurbish their planes and compete with each other on amenities. That's the business Rockwell Collins wants.
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