CEO’s Dream of Giant Supplier Clashes With Boeing, Airbus DoubtsBy and
United Technologies seeks support for Rockwell Collins deal
Planemakers emerge as skeptics of the $23 billion acquisition
Greg Hayes has thought about buying Rockwell Collins Inc. for years. He finally pulled it off this week, only to find that two of his biggest customers are becoming major obstacles for the $23 billion acquisition.
The United Technologies Corp. boss is holding high-stakes calls with planemakers this week in a bid to win support for one of the largest transactions in aviation history. Boeing Co. and Airbus SE emerged as skeptics of the deal, with the U.S. company questioning the benefits and its European counterpart warning Hayes not to lose focus on delivering a trouble-plagued jet engine for the A320neo.
The tension underscores the pressures in the aerospace supply chain as Boeing and Airbus ramp up output of single-aisle jetliners, their biggest source of profit. They’re also pushing suppliers for discounts, which is one reason Hayes proposed joining forces with Rockwell Collins in a deal that brings engines, aircraft brakes, aviation electronics and airplane interiors under one corporate umbrella.
“It really became apparent to all of us that you have to get bigger,” Hayes said in an interview. “The forces of nature in the aerospace business are such that we need to figure out how we’re going to reduce costs, how we’re going to get the next generation of technology in development.”
Hayes is already contending with investor doubts and warnings of downgrades to United Technologies’s credit rating. The shares tumbled 5.7 percent to $111.21 on Tuesday, the most in two years and the biggest drop on the Dow Jones Industrial Average. Reaction from credit raters to the debt-reliant deal was also swift, with Moody’s Investors Service, S&P Global Ratings and Fitch Ratings putting the manufacturer on review for a possible downgrade.
The response of the aircraft manufacturers is crucial as United Technologies works toward closing the deal, a milestone that is projected for the third quarter of next year.
“While we do not expect significant challenges to securing government regulatory approval for the transaction, we believe the approval of aircraft manufacturers is significant given the change-of-control clauses in all the commercial aerospace supplier contracts,” Nicholas Heymann, an analyst at William Blair & Co., said in a report.
Boeing said it was “skeptical” a deal would be in the best interests of customers and the broader industry.
“Should we determine that this deal is inconsistent with those interests, we would intend to exercise our contractual rights and pursue the appropriate regulatory options to protect our interests,” it said in an emailed statement.
Airbus pressed United Technologies to make sure it can keep up with commitments to deliver its Pratt & Whitney jet engines on time after a rocky rollout for the company’s geared turbofan, which cost $10 billion to develop.
The planemakers “are using this as an opportunity to apply a little more pressure,” Jeff Windau, an analyst at Edward Jones, said in an interview. “In both cases, the companies want to maintain their negotiating position.”
Brazil’s Embraer SA and Montreal-based Bombardier Inc. are also major customers of both United Technologies and Rockwell Collins. Embraer said the tie-up would bring benefits to the industry. Bombardier declined to comment.
Boeing is treading on suppliers’ turf with a new avionics business as well as a new spare-parts and services division with ambitions to reach $50 billion in sales. Hayes points to the company’s efforts to rein in supplier costs with its “Partnering for Success” program. His counterpart at Rockwell Collins, Chief Executive Officer Kelly Ortberg, criticized Boeing last year for stretching payment schedules with little warning.
With the aerospace industry gripped by change, “I said, ‘Kelly, we need to do something,’” Hayes said of his initial overture to Ortberg. “To his credit, he didn’t hang up the phone.”
Hayes said he made the call soon after Rockwell Collins completed a deal in April to buy B/E Aerospace for $8.6 billion, including debt. A series of one-on-one meetings between the two executives followed by formal negotiations culminated this week in the deal.
The transaction was a long time coming for Hayes, who saw value in a deal for Rockwell Collins when he joined rival Sundstrand in 1989. United Technologies would acquire Sundstrand a decade later, but Rockwell Collins proved elusive, Hayes said.
It’s possible the CEO has another deal or two up his sleeve.
About half of sales at United Technologies come from building-related businesses such as Otis elevators and Carrier air conditioners. The company may consider separating those operations from aerospace, a move that could generate an additional $20 a share in value, said Jeff Sprague, an analyst with Vertical Research partners.
“We still see the need to break up” United Technologies, he said in a note. That could “unlock the conglomerate discount and bring this deal to its ultimate logic.”
Hayes acknowledged the possibility of additional changes to the portfolio, but said they probably wouldn’t come until after United Technologies uses the cash flows of those divisions to repay debt, which could total about $50 billion when the deal closes. The company said it would suspend share repurchases for several years and tamp down dealmaking while digesting Rockwell Collins.
“After a couple of years, we’ll pay down a big chunk,” Hayes said. “Then we’ll take a look at the portfolio and decide what we want to do.”
— With assistance by Fabiola Moura, and Frederic Tomesco