United Technologies Deal Strategic but Pricey
After acquiring narrow-moat Rockwell Collins, wide-moat United Technologies will increasingly trade like an aerospace stock and generate roughly 60% of its 2019 revenue from aerospace and defense.
On Sept. 4, United Technologies (UTX) announced it had reached an agreement to acquire narrow-moat aerospace supplier Rockwell Collins (COL) for $140 per share ($93.33 in cash and $46.67 in shares of United Technologies stock for each Rockwell share). This equates to an equity value of $23 billion and enterprise value of $30 billion and is on the low end of our estimated deal value. United Technologies will finance the deal with cash, debt, and equity. Based on initial details, we anticipate our United Technologies fair value estimate of $129 per share to increase roughly 5%; we don’t expect our wide moat rating to change. We also plan to raise our Rockwell fair value estimate to $140 from $134.
We think this move makes strategic sense because it broadens United Technologies’ aerospace portfolio, which remains highly dependent on the geared turbofan engine. However, the deal seems a touch expensive--the enterprise value/EBITDA multiple is close to 14 times, compared with around 13 times for other large aerospace deals per PitchBook. Cost synergies are pegged at $500 million. United Technologies delivered $500 million in cost savings on its 2012 Goodrich acquisition, which was about 6% of Goodrich’s operating costs. Based on this, the $500 million looks realistic but a bit of stretch since it equates to a slightly higher percentage (7%) of Rockwell’s total operating costs. We also think Rockwell is very well run and cost savings may prove difficult to find.
We believe United Technologies will increasingly trade like an aerospace stock and estimate it will generate roughly 60% of its 2019 revenue from aerospace and defense. This makes us question what’s in store for Otis and CCS, which we forecast at lower growth rates (but higher margins) than the aerospace businesses. We were thinking a United Technologies breakup might accompany this deal, so we’re anticipating more color on the portfolio during the Sept. 5 call to discuss the acquisition.
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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.