By Ted Mann
United Technologies Corp. has considered parting ways with the
Sikorsky Aircraft helicopter business it has owned for more than
eight decades several times in recent years. But there was always a
barrier: Louis loved it.
Former Chief Executive Louis Chênevert, who abruptly left United
Technologies late last year, wouldn't consider a sale or spinoff of
Sikorsky, a person familiar with the matter said. Mr. Chênevert
didn't respond to a request for comment.
The helicopter unit makes the iconic Black Hawk for the U.S.
military and is a supplier of Marine One, the chopper that carries
the president.
Now, new CEO Greg Hayes is reversing course, under pressure to
streamline the conglomerate's portfolio and with challenges
building for the helicopter business. Sikorsky's big markets
include the U.S. military and the oil business, both under stress
as wars wind down and crude prices have tumbled. Mr. Hayes will
make a decision on whether to spin off the unit by June and try to
complete a transaction by the end of the year.
"They didn't fit the growth profile that we're looking for to
set us apart for the next decade," Mr. Hayes said Thursday. The
business is growing too slowly and is overly dependent on Defense
Department contracts, he said. Mr. Hayes acknowledged his
predecessor's devotion to Sikorsky. "Louis believed it to be an
iconic asset," he said.
In the first two months of this year, United Technologies
approached a few companies about acquiring Sikorsky, Mr. Hayes
said, but it quickly became clear that taxes would prove an
obstacle to making a sale. The low tax basis of the helicopter
company, which United Technologies' predecessor acquired in 1929,
would have meant securing an unreasonably high price from a buyer
in order to overcome the tax bill, he said.
Global military helicopter sales are forecast to fall to EUR10
billion, or about $10.6 billion, in 2019 from EUR15 billion last
year, according to IHS Jane's. The consultancy estimates the
civilian helicopter market could expand by a third to about EUR8
billion in four years, but the forecast is tempered by the prospect
of falling sales to oil-and-gas industry users.
United Technologies is already bracing for years of depressed
profit margins in its other marquee aviation business, engine maker
Pratt & Whitney, which is still absorbing research and
manufacturing costs associated with a new family of commercial
airplane engines as it ramps up production.
Morgan Stanley analyst Nigel Coe said in a note to clients that
the contemplation of a significant alteration to the company's
portfolio "shouts action and change" to investors hungry for some
of both.
Sikorsky, which had sales of $7.5 billion last year, is the
global market leader in military helicopter sales alongside Boeing
Co. and Airbus Group NV. Shipments were flat last year. Sikorsky
shipped 178 helicopters for military platforms in 2014, little
changed from 177 a year earlier. Commercial shipments fell to 59
from 63.
The outlook for the company has improved, however, thanks to a
clean sweep of big Pentagon awards and the resolution of a contract
dispute with the Canadian military.
Winning the rescue helicopter contract for the Air Force and one
for a new presidential helicopter fleet, both in partnership with
Lockheed Martin Corp., have lifted its U.S. military backlog to
around $40 billion. The company has also made strides in the export
market, securing a big deal with Turkey last year and is among the
contenders for Poland's coming military helicopter deal.
Sikorsky estimates its military sales will grow by 5% to 7% this
year from 2014, with commercial business rising by 3% to 5%.
Analysts who have been chewing over a potential disposal of
Sikorsky for months put an enterprise value of between $8 billion
and $9.5 billion on the business, which would translate to an
equity value of around $5.6 billion if United Technologies opts for
a tax-free spinoff and loads Sikorsky up with debt to pay a
dividend back to its parent on its way out the door, RBC Capital
estimated.
If United Technologies opts for a sale, private-equity buyers
have started to reappear in the defense sector after five or more
years of muted activity. Trade buyers such as Boeing or even a
combination with the Bell unit of Textron Inc. are viewed as less
likely.
Some analysts have said a spinoff makes more sense than a sale,
which could trigger a major tax bill for United Technologies. The
parent company has owned Sikorsky since 1929, shortly after Igor
Sikorsky moved his aircraft manufacturing business to Stratford,
Conn., from Long Island.
Doug Cameron contributed to this article.
Write to Ted Mann at ted.mann@wsj.com and Doug Cameron at
doug.cameron@wsj.com
Access Investor Kit for The Boeing Co.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0970231058
Access Investor Kit for Lockheed Martin Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US5398301094
Access Investor Kit for Textron, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US8832031012
Access Investor Kit for United Technologies Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US9130171096
Subscribe to WSJ: http://online.wsj.com?mod=djnwires