One-Two Punch

Rockwell Collins Megadeal Should Come With a Chaser

United Technologies could get more out of the acquisition by pairing it with a breakup.
Photographer: Geoffroy Van Der Hasselt/Bloomberg
UNITED TECHNOLOGIES CORP
+2.86
At Closing, May 21nd
128.05 USD
ROCKWELL COLLINS INC
+1.14
At Closing, May 21nd
137.48 USD

United Technologies Corp. appears to be bringing its surprising takeover talks with Rockwell Collins Inc. to an unsurprising conclusion: a very pricey bid. It better be prepared to justify that.

The industrial conglomerate is closing in on a price of around $140 a share for Rockwell Collins, a maker of flight controls and other avionics systems, and the two could come to an agreement as soon as this weekend, the Wall Street Journal reported on Tuesday. The speculated $30 billion purchase (including debt) is a bit jarring given the sheer size and expensiveness of the target, and the fact that Rockwell Collins itself just closed on a pricey $8.3 billion takeover of B/E Aerospace. It only really makes some sense in the context of a larger United Technologies breakup. Some is the key word there.  

Split Personality

United Technologies' aerospace divisions are growing much more quickly than the rest of its business amid the rollout of its new jet engine and healthy aftermarket demand

Source: Bloomberg, company 2017 outlook presentation

United Technologies trades at a discount to its estimated sum of the parts, but CEO Greg Hayes has rebuffed calls for a split in the past, especially when it comes to aerospace, contending those operations wouldn't generate enough cash flow on their own to fund the expensive investments inherent to that business. But adding a nice stream of Rockwell Collins earnings to the mix would help alleviate that concern and make the divisions better able to stand on their own.  

With an eye toward the boosted valuation that would likely result, shareholders might be more willing to stomach the lofty price tag for Rockwell Collins. And it would be lofty: at $140 a share, a deal would value the target at more than 18 times its projected Ebitda for this year. That would be high enough to put this transaction in the upper echelons of expensiveness for large aerospace and defense acquisitions. 1

Rockwell Climbing

United Technologies must have missed the "buy low" part of M&A class

Source: Bloomberg

The build-and-break move is one that Danaher Corp. used with some success when it announced a split along with a richly valued purchase of filtration-technology maker Pall Corp. in 2015. But Pall wasn't also in the process of integrating its own multi-billion dollar acquisition at the time Danaher bought it, as Rockwell Collins is. Boeing Co. and Airbus SE aren’t going to look kindly on supply-chain disruptions or delivery delays that might result from a combination of two of the biggest aerospace-systems suppliers. Competitors, I'm sure, would be only too happy to step up. 2  Whatever issues might be lurking in United Technologies' existing businesses will also get magnified. 

Playing From Behind

United Technologies has underperformed a basket of industrial peers and rival Honeywell over the past five years.

Source: Bloomberg

It's not clear yet whether a breakup is United Technologies' ultimate plan. Most of the reporting to date has focused on a bid for Rockwell Collins -- not what happens afterward. Hayes' other argument against a split has been that it would be too costly to duplicate back-office functions shared across its business units and renegotiate common supplier contracts. Rockwell Collins doesn't necessarily solve that part of the problem, although synergies -- limited as they are likely to be -- may help some.

But while a Rockwell Collins deal with a breakup still raises some red flags, a takeover without one raises even bigger ones. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Certainly it's more expensive than what Rockwell Collins paid for B/E Aerospace and what United Technologies forked over for its last big deal, the $18 billion takeover of Goodrich Corp. in 2012.

  2. They are also likely to protest this deal and the leverage it will give one of their biggest suppliers. 

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net

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