Coverage: United Technologies near deal for Rockwell Collins

United Technologies Corp. is nearing a deal to buy Rockwell Collins Inc. for more than $20 billion, a tie-up that would create one of the world’s biggest aircraft-equipment makers.

Dana Mattioli, Joann S. Lublin and David Benoit of The Wall Street Journal had the news:

The companies are discussing a per-share price for Rockwell of $140 or less and could come to an agreement as soon as this weekend, according to people familiar with the situation. Rockwell shares closed at $127.99 Monday, giving the company a market value of $20.8 billion.

As with all acquisition talks, it is possible they could hit a snag and not result in a deal, or the expected price could change.

The deal would boost United Technologies’ business supplying Boeing Co. and Airbus SE as the aerospace industry ramps up for a new generation of jets. The company already owns one of the world’s biggest jet-engine makers, Pratt & Whitney, part of an aerospace division that also makes parts such as wheels and landing gear.

Rockwell specializes in cockpit displays and communications systems for passenger jets and military programs. In April, the Cedar Rapids, Iowa, company closed its roughly $6 billion acquisition of B/E Aerospace Inc., a maker of plane seats and interiors.

Stephen Singer of The Hartford Courant reported that United Technologies had discussed a deal with Honeywell last year:

The Farmington-based conglomerate brushed aside an advance last year. It engaged with rival Honeywell International Inc. in “preliminary, exploratory conversations” about a merger, but the talks ended, UTC said, over concerns about antitrust regulations, customer opposition and how the companies would be valued.

United Technologies is among the biggest private employers in Connecticut, though it was reduced in size when it sold helicopter manufacturer Sikorsky Aircraft to Lockheed Martin Corp. in 2015 for $9 billion.

UTC has invested heavily in its next-generation geared turbofan engine made by subsidiary Pratt & Whitney. Production has endured problems that forced delivery delays to customers, but UTC executives have been bullish about what they see as an expansion of air travel in the coming decades.

UTC has a market value of $93.56 billion and Rockwell Collins, based in Cedar Rapids, Iowa, has a value of $21.25 billion.

Brooke Sutherland of Bloomberg Gadfly reported that the price that United Technologies is offering is high:

The industrial conglomerate is closing in on a price of around $140 a share for Rockwell Collins, a maker of flight controls and other avionics systems, and the two could come to an agreement as soon as this weekend, the Wall Street Journal reported on Tuesday. The speculated $30 billion purchase (including debt) is a bit jarring given the sheer size and expensiveness of the target, and the fact that Rockwell Collins itself just closed on a pricey $8.3 billion takeover of B/E Aerospace. It only really makes some sense in the context of a larger United Technologies breakup. Some is the key word there.

United Technologies trades at a discount to its estimated sum of the parts, but CEO Greg Hayes has rebuffed calls for a split in the past, especially when it comes to aerospace, contending those operations wouldn’t generate enough cash flow on their own to fund the expensive investments inherent to that business. But adding a nice stream of Rockwell Collins earnings to the mix would help alleviate that concern and make the divisions better able to stand on their own.

With an eye toward the boosted valuation that would likely result, shareholders might be more willing to stomach the lofty price tag for Rockwell Collins. And it would be lofty: at $140 a share, a deal would value the target at more than 18 times its projected Ebitda for this year. That would be high enough to put this transaction in the upper echelons of expensiveness for large aerospace and defense acquisitions.