August 30, 2017 / 6:37 PM / a year ago

Breakingviews - United Technologies’ avionics bid looks airworthy

NEW YORK (Reuters Breakingviews) - United Technologies’ avionics bid looks airworthy. The conglomerate’s potential acquisition of Rockwell Collins should deliver enough cost savings to justify paying a reported price tag of nearly $23 billion. Greater size also promises increased negotiating heft with Boeing and Airbus. Investors have good reason to clear this deal for takeoff.

Cockpit equipment made by Rockwell Collins and used in a CH-47 Chinook helicopter is pictured at the ILA Berlin Air Show in Schoenefeld, south of Berlin, Germany, June 1, 2016. REUTERS/Fabrizio Bensch

United Technology’s last big aeronautics deal – paying $16.5 billion for Goodrich in 2011 – succeeded handily in lowering costs. The Farmington, Connecticut-based company originally promised $400 million of savings but ended up delivering $500 million. That was about 7.5 percent of the target’s annual operating costs prior to acquisition.

A similar level of efficiency gains at Rockwell Collins would produce $530 million of annual savings. Taxed at 30 percent, put on a multiple of 10 and discounted, these would be worth more than $3 billion today.

Rockwell Collins had a market capitalization of $19.3 billion prior to reports of a bid in early August. The Wall Street Journal reports the companies are discussing a purchase price of up to $140 per share. At that level, the takeout price would be a little under $23 billion – and the premium would be roughly equal to the expected savings.

There’s another, potentially more important, reason to pursue Rockwell Collins. In July Boeing said it was setting up a unit to produce avionics and electronic systems currently supplied by contractors like United Technologies and Rockwell Collins. Such moves by airplane makers threaten to squeeze their suppliers’ sales and operating margins, currently an attractive 20 percent or so. A merger could help United Technologies resist such pressure. It’s also risky and initially expensive for a company to start making its own parts, so Boeing may not want to bargain too hard against a key, large supplier.

Combining two big firms carries risks of its own. Airbus on Wednesday issued an unusual public statement cautioning United Technologies that it shouldn’t let M&A distract it from delivering engines that are already behind schedule. Yet Chairman and Chief Executive Gregory Hayes might take more comfort than concern from that warning. After all, if airplane makers are worried his pursuit of Rockwell will create a more powerful supplier, that’s probably an argument in favor of the deal.


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