China approved United Technologies’ purchase of Rockwell Collins on Friday. The news was more than the biggest deal-related development on a holiday-shortened trading day: It has implications for a large number of industrial and aerospace players.
Most immediately, the decision brings the
(ticker: UTX) portfolio review back into focus. Recall that Dan Loeb’s Third Point Capital took a position in United Technologies stock in the first quarter of 2018. Loeb believes there is significant value in splitting United Technologies into three parts: an aviation business, a climate-control operation and an elevator company.
United Technologies stock closed $3.33, or 2.65%, higher at $129.04, while
(COL) gained $11.96, or 9.2%, to $141.63.
United Technologies said in March that once the Rockwell Collins (COL) deal was complete, management would “begin a review of the portfolio, all the portfolio.” That means analysts will start to produce sum-of-the parts reports that try to value each business on a stand-alone basis, as well as together.
United Technologies trades for 10.6 times next year’s estimated Ebitda (earnings before interest, taxes, depreciation and amortization). That’s right about where other aerospace suppliers trade, but as Loeb noted, there’s more to United Technologies than aircraft parts. Climate-control player Lennox is trading for 14 times estimated Ebitda and Finnish elevator maker Kone sells for 16 times.
Carrier—the climate-control brand name—makes up about 30% of United Technologies revenues, and Otis Elevators makes up about 21% of the top line.
William Blair analyst Nicholas Heymann tells Barron’s he expects Carrier will be spun off or sold. And Barron’s has speculated that a Carrier spinoff could lead to more deal making in the climate-control industry.
Whether a climate deal alone would satisfy Third Point isn’t known. Third Point wasn’t immediately available for comment and United Technologies said they had “nothing more to share right now” about the portfolio review.
If that’s not enough, think about
(GE). Everything seems to affect GE these days.
In this instance, GE is looking to sell assets and raise cash to alleviate investors’ fears about its debt. Selling a small portion of its aviation assets could be a new option investors haven’t considered. CEO Larry Culp has said aviation will be part of GE’s future for the long term, but the news highlights the value the conglomerate could realize.
The space is hot. Aerospace mergers and acquisitions are up this year—a lot. With the Collins deal closing, aerospace and defense transactions will exceed $40 billion in 2018. That’s up from an average of about $20 billion a year in each of the prior four years.
And there are a lot of buyers for aerospace assets. Even
(BA) is interested in parts now. Boeing purchased aerospace parts distributor KLX this year as part of its new strategy to expand beyond aircraft manufacturing.
Boeing may have interest in the GE Avionics business, which GE purchased in 2007. GE Avionics has a 50/50 joint venture with Chinese plane maker COMAC to provide flight systems on the single aisle C919. The link with COMAC may not preclude Boeing from taking a look at the Avionics unit; Boeing may actually want some connection to the Chinese aerospace program.
Boeing could also look at two smaller businesses the Justice Department is requiring United Technologies to divest to close the Collins deal. The company didn’t immediately respond to a request for comment.
It is probably no accident that China approved the deal this week, just ahead of the G-20 meetings.
Political tensions have been a concern for investors since United Technologies agreed to buy Rockwell Collins in September 2017. CEO Greg Hayes offered reassurance on United Technologies’ third-quarter earnings conference call last month, saying “we just don’t see [United Technologies] as being caught up in the Sino-U. S. political issues.”
Indeed, politics haven’t derailed this deal, but approval may be an olive branch to U.S. officials after months of heightened trade rhetoric. China was the last country to sign off on the merger on antitrust grounds.
A $30 billion transaction is significant for the aviation industry, but the fact that this merger will now close is a big deal for other reasons. It could produce a cascade of consequences that will be felt up and down the industrial value chain.
Write to Al Root at [email protected]