United Technologies-Rockwell Tie-Up Looks Likely
Rockwell is one of the few attractive targets that could move United Technologies' $57 billion revenue needle.
Reports surfaced Aug. 4 that wide-moat United Technologies (UTX) was eyeing an acquisition of narrow-moat aerospace supplier Rockwell Collins (COL). Neither company has commented. However, the absence of denials, Rockwell's cancellation of a roadshow, and further rumors of a United Technologies bid indicate to us the transaction is more likely than not to occur. Because we believe a deal will come to fruition, we’re adjusting our Rockwell fair value estimate to a probability-weighted $133 (75% chance of deal closure). If the deal fails to materialize, our stand-alone fair value estimate for Rockwell is $103 per share.
While the deal might end up being a bit pricey (see our Aug. 9 note for financial details), we clearly see a strategic motivation. United Technologies has struggled to grow, and its aerospace business remains highly dependent on the future of its revolutionary geared turbofan engine, which has faced production quality challenges. Rockwell should inject some growth and also diversify United Technologies' portfolio, given the minimal overlap between the two companies' business lines.
We expect Rockwell will command a premium, so we've put the acquisition price at around $142 a share, which is 20% above the pre-deal-rumor share price, but we think the final price could easily end up in the $150s. Rockwell is one of the few attractive targets that could move United Technologies' $57 billion revenue needle. The other sticking point revolves around Airbus and Boeing. We expect both aircraft manufacturing behemoths to push back against merger approval, arguing that it exacerbates a lack of competition among their suppliers. For years, Boeing and Airbus encouraged (or at least acquiesced to) mergers in order to better support their programs. They are victims of their own success, as we count only seven major system, engine, and interior suppliers today: General Electric, United Technologies, Honeywell, Rockwell, Safran, Rolls-Royce, and Thales.
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Chris Higgins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.