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September 6, 2017

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United Tech agrees to buy Rockwell Collins

Aerospace supplier United Technologies Corp has struck a US$30 billion agreement to buy avionics and interiors maker Rockwell Collins Inc, the companies said on Monday, in a deal that bulks up UTC’s power with plane makers by creating one of the world’s largest makers of civilian and defense aircraft components.

Farmington, Connecticut-based United Technologies will pay US$140 per share for Rockwell Collins, split between US$93.33 in cash and $46.67 in stock, according to the companies. The price represents a 17.6 percent premium to Rockwell’s US$119 share price before news of the talks emerged on August 4.

Shares of Cedar Rapids, Iowa-based Rockwell Collins closed at US$130.61 on Friday. US markets were closed on Monday for the Labor Day holiday.

The acquisition price implies a total transaction value of US$30 billion, including Rockwell Collins’ debt, and a total equity value of US$23 billion. United Tech said it plans to fund the cash portion through debt issuances and cash on hand.

Under the deal, the companies said that Rockwell Collins and UTC’s aerospace systems segment will be combined to create a new business unit named Collins Aerospace Systems.

United Tech said yesterday it has no immediate plans to sell off other businesses after it agreed to acquire Rockwell Collins Inc.

United Tech also knocked down speculation that the acquisition would prompt it to spin off other businesses, such as Carrier air conditioners or Otis elevators.

“We need the cash flows from all the businesses to help pay down some of this debt” and retain an investment-grade credit rating, United Tech Chief Executive Officer Greg Hayes said on a conference call with analysts.

United Tech expects to borrow US$15 billion to fund the deal, Hayes said, and it will assume US$7 billion in Rockwell Collins debt as part of the transaction announced on Monday, which is expected to close by the third quarter of 2018.

“Because the deal is structured as a conventional acquisition with debt, United Tech has to pay some of this off before doing anything else,” said Robert Stallard, analyst at Vertical Research Partners.

The acquisition creates a major supplier to Boeing Co, Airbus SE and Bombardier at a time when the plane makers are pressing for price cuts and trying to compete against suppliers on services and spare parts.

It also marks the second largest aerospace deal that creates an engines-to-seating supplier, following jet engine maker Safran SA’s pending US$7.7-billion deal to buy seat maker Zodiac Aerospace. Safran said yesterday it would look at assets that might come up for sale after the United Tech-Rockwell deal.

Safran is part of CFM International, a joint venture with General Electric Co that makes LEAP engines used on Airbus A320 and Boeing 737 MAX aircraft.

“This acquisition adds tremendous capabilities to our aerospace businesses and strengthens our complementary offerings of technologically advanced aerospace systems,” UTC’s chairman and chief executive officer, Greg Hayes, said in the statement.

“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,” he said.

The creation of a new giant in the top echelon of aircraft parts makers comes as planemakers Boeing Co and Airbus SE are trying to capture more of the profits earned by their suppliers. Both are pushing suppliers to lower prices and are moving into the high-margin aftermarket arena for parts and services that suppliers now enjoy.

In a move seen as a threat to Rockwell, Boeing said in July that it would build up its own avionics business.

Last week, Airbus urged supplier UTC to stay focused on fixing industrial problems that have delayed new aircraft deliveries.

If plane makers “are going to take more of the aftermarket or demand more of the aftermarket, we’re going to have to think about how we price our products,” Hayes told analysts in July.

By making more of the components needed on each aircraft, analysts say, United Tech likely will gain some leverage to resist such pressures.

The deal also follows a wave of consolidation among smaller aerospace manufacturers in recent years that was caused in part by the need to invest in new technologies such as metal 3-D printing and connected factories to stay competitive. A combined United Tech and Rockwell Collins could similarly invest, and their broad portfolios have little overlap.

United Tech makes Pratt & Whitney jet engines used by Airbus, Bombardier Inc, Embraer SA and other plane makers.


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