Confirming industry grapevines, diversified industrial conglomerate United Technologies Corporation UTX recently inked a definitive agreement to acquire Iowa-based avionics firm, Rockwell Collins, Inc. COL. The strategic transaction is likely to create an industry behemoth with an unrivaled competitive advantage, being one of the largest aircraft equipment manufacturers in the world in its individual capacity.
The Merger
United Technologies acquired Rockwell Collins for $140 per share in a combination of cash and stock. Under the terms of the agreement, each Rockwell Collins shareholder is entitled to receive $93.33 per share in cash and the balance amount or $46.67 in United Technologies’ shares. This equates to a purchase price of $30 billion, including Rockwell Collins' net debt.
The company expects to fund the transaction through secondary debt offering and available cash while maintaining solid investment grade credit ratings. The transaction is likely to close by the third quarter of 2018, subject to mandatory approvals and other customary closing conditions.
United Technologies has outperformed the industry with an average year-to-date return of 7.6% as against a decline of 1.9% for the latter.
Likely Benefits
The acquisition is expected to offer United Technologies a bigger clout in the industry and increase its bargaining power as it would emerge as one of the largest aircraft equipment manufacturers. The combined company would be better suited to meet the evolving global customer needs. With complementary products, the combination is likely to yield operating synergies through lower operating costs and more opportunities to cross sell the products. United Technologies expects the merger to be accretive to adjusted earnings per share after the first full year of combined operations with synergies to the tune of more than $500 million.
Post completion, Rockwell Collins and United Technologies’ UTC Aerospace Systems division will be integrated to create a new business unit called Collins Aerospace Systems. On a pro forma basis, Rockwell Collins is expected to record sales in excess of $8 billion while United Technologies is likely to generate global sales of approximately $67 billion to $68 billion.
Moving Forward
With an improvised product portfolio, the company is likely to become an even more critical supplier of components to big aircraft manufacturers like The Boeing Company BA and Airbus SE EADSY. The consolidation of two industry heavyweights could further set off a wave of similar such deals across the defense industry.
The acquisition is expected to boost United Technologies’ aerospace segment that has been struggling of late with severe delays in for supply orders in the Pratt & Whitney division. We remain bullish on the inherent growth potential of this Zacks Rank #3 (Hold) stock post the transaction. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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