United Technologies and Rockwell Collins announced that they have reached a definitive agreement under which United Technologies (UTC) will acquire Rockwell Collins for $140.00 per share, in cash and UTC stock. The purchase price implies a total equity value of $23 billion and a total transaction value of $30 billion, including Rockwell Collins' net debt.
Under the terms of the agreement, each Rockwell Collins shareowner will receive $93.33 per share in cash and $46.67 in shares of UTC common stock, subject to a 7.5% collar centered on UTC's August 22, 2017 closing share price of $115.69. UTC expects to fund the cash portion of the transaction consideration through debt issuances and cash on hand, and the company is committed to taking actions to maintain strong investment grade credit ratings. The transaction is projected to close by the third quarter of 2018, subject to approval by Rockwell Collins' shareowners, as well as other customary closing conditions, including the receipt of required regulatory approvals.
"This acquisition adds tremendous capabilities to our aerospace businesses and strengthens our complementary offerings of technologically advanced aerospace systems," said Chairman and Chief Executive Officer Greg Hayes of United Technologies. "Together, Rockwell Collins and UTC Aerospace Systems will enhance customer value in a rapidly evolving aerospace industry by making aircraft more intelligent and more connected."
"We are extremely pleased to announce this compelling transaction with UTC which is a testament to the value we have created for Rockwell Collins' employees, customers and shareowners," said Kelly Ortberg, Chairman, President and Chief Executive Officer of Rockwell Collins. "The combination will enable us to compete more effectively for future business through continued investments in innovation, world-class integrated product offerings and the ability to retain the top talent in the industry. We look forward to the next chapter in Rockwell Collins' long and proud history, as part of UTC."
Upon completion of the transaction, Rockwell Collins and UTC Aerospace Systems will be integrated to create a new business unit named Collins Aerospace Systems. Kelly Ortberg will assume the role of Chief Executive Officer with Dave Gitlin serving as President and Chief Operating Officer.
On a pro-forma 2017 basis, UTC is expected to have global sales of approximately $67 to $68 billion following the transaction, based on estimated results. UTC expects the combination will be accretive to adjusted earnings per share after the first full year following closing and generate an estimated $500+ million of run-rate pre-tax cost synergies by year four.
United Technologies, with its units Pratt & Whitney and aerospace divisions, is the largest aircraft parts manufacturer, while Rockwell Collins is the fourth. After the deal, the two will form a supply giant, double the size of its nearest competitors. However, despite the strategic rationale of the move, some critics expressed doubt if the best time to do this is now, as scope of deal can dilute earnings and make a challenge achieving targeted returns.
"We believe the acquisition will create the largest tier 1 aerospace supplier, with important positions on all major programs. Moreover, we believe this deal is partly in response to the increased pricing pressure from the leading aerospace OEMs (Airbus and Boeing) and the increased push by the leading OEMs, notably Boeing, into the commercial aftermarket, traditionally the source of most industry profits and cash flow,” said Ken Herbert, Aviation analyst at Canaccord Genuity. “There is very little overlap between the current UTX and COL portfolios, and we do not anticipate any material regulatory hurdles as part of the acquisition process."
"We can appreciate that there could be some pushback on the valuation, at 14.5x our FY18 COL EBITDA estimate of $2.1B. UTX did indicate that it may look to divest some assets in the future to focus more on A&D markets," added Herbert. "It is important to note that there could be a step up in larger company consolidation, but that consolidation in the aerospace sector in small to mid-size companies has been moving forward."