United Technologies, Raytheon to form company valued at more
than $100 billion
By Cara Lombardo and Doug Cameron
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (June 10, 2019).
United Technologies Corp. doubled down on the aerospace market
with an all-stock deal to merge with defense contractor Raytheon
Co., after UTC executives earlier chose to exit the escalator and
air-conditioner businesses.
The combined company, valued at more than $100 billion after
planned spinoffs, would be the world's second-largest
aerospace-and-defense company by sales behind Boeing Co., with
annual revenue of about $74 billion this year. It will make
everything from engines and seats for jetliners and F-35 jet
fighters, to Patriot missile launchers and space suits for
astronauts.
The proposed deal intensifies the consolidation in the aerospace
and defense industry as plane makers seek better terms from
suppliers and the Pentagon puts more pressure on contractors to cut
costs and invest more of their own money in new technologies, such
as space systems and cybersecurity.
The new company will be named Raytheon Technologies Corp., and
executives on Sunday called the deal, which doesn't include a
takeover premium, a merger of equals. UTC shareholders will own 57%
of the shares and UTC will appoint eight of the 15 new directors.
The Wall Street Journal reported Saturday that the two sides were
nearing a deal.
UTC's current leader, Greg Hayes, will serve as CEO of the
merged company, with Raytheon CEO Tom Kennedy as executive chairman
for two years. Executives said the merger would allow them to boost
research spending and squeeze out some $1 billion in annual costs
from the marriage.
Raytheon shareholders will receive 2.3348 shares in the new
company for every share they currently own. The combined company
will have about $26 billion in debt, with $24 billion coming from
UTC. It will be based in the Boston area.
The combined entity would be split about 50/50 between
commercial and defense sales, though military is likely to shrink
as a proportion as UTC's Pratt & Whitney division ramps up
deliveries of its latest jetliner engines. One-third of the two
companies' aerospace and defense revenue last year -- some $25
billion -- came from the Pentagon.
"There is some truth to the idea that bigger is better,"
Jefferies analyst Sheila Kahyaoglu wrote in a note to clients
Sunday. "With common customers there is some leverage to size and
the supply chain."
"What's even more important is the underlying technology both
companies are developing," Mr. Kennedy said in an interview.
Raytheon first approached Mr. Hayes about a deal last year, he
said.
Mr. Kennedy pointed to areas such as hypersonics -- missiles
traveling more than five times the speed of sound -- and
air-traffic-control systems where the enlarged company can be a
dominant player.
Byron Callan, a defense analyst at Capital Alpha LLC., said the
proposed deal reflected the likely slowing of military spending
increases and the need for companies to boost their investment in
new technologies.
The tie-up would complete a radical transformation at UTC, a
once sprawling conglomerate that already plans to spin off its Otis
elevator and Carrier building-systems businesses into separate
companies.
Raytheon would be combining with UTC's remaining aerospace
business, and the companies expect the transaction to close in the
first half of next year, after UTC completes the spinoffs.
The deal isn't expected to attract significant antitrust
scrutiny, analysts said, because UTC and Raytheon don't compete
against each other in most of their markets.
"It's a nonissue," said Mr. Hayes, with expected divestitures of
just $80 million a year in sales. However, the companies have yet
to brief the Pentagon or suppliers.
UTC makes engines, landing gear and other parts for commercial
and military planes. Raytheon produces missiles such as the
Tomahawk together with Patriot missile-defense systems, radars and
other electronic-warfare systems.
"There is minimal overlap for the two companies," said Ms.
Kahyaoglu. The companies could mutually benefit from their separate
expertise, she said, such as leveraging UTC's expertise in global
positioning systems across Raytheon's missile programs.
The deal is the largest announced so far in a year that has
included some big mergers but otherwise has been lackluster. Before
this, the biggest proposed acquisition this year was Bristol-Myers
Squibb Co.'s $74 billion purchase of rival drugmaker Celgene
Corp.
Farmington, Conn.-based UTC, which acquired Rockwell Collins for
$23 billion late last year, is one of the U.S.'s last remaining big
industrial conglomerates -- though it is set to radically transform
with the spinoffs and now the merger.
The Otis elevator division and Carrier building-systems
businesses will become separate publicly traded companies, leaving
UTC as a pure-play aerospace company.
Investors are pressuring traditional conglomerates to become
more focused. Rivals Honeywell International Inc. and General
Electric Co. are both shaving off units to streamline their
businesses. Several activist investors had pushed UTC to split.
Waltham, Mass.-based Raytheon's sales rose 6.7% last year to
$27.1 billion but it has largely avoided big deals. It has invested
heavily in recent years ahead of the recent uptick in Pentagon
spending, and has the biggest export business among the five
largest U.S. defense contractors.
The two-year uptick in Pentagon spending on new aircraft,
missiles and other defense equipment is also running out of steam,
with analysts projecting muted growth over the next several
years.
Pentagon spending fell sharply between 2013 and 2017 because of
broader federal budget pressures and then expanded at a clip of
around 10% in the final year of the Obama administration budget and
the first two of the Trump era. Spending increases are now slowing
to low single-digit increases, and much of the additional money is
being directed at refreshing U.S. nuclear forces.
A major defense industry merger has the benefits of providing
economy of scale, making its supply chain leaner and creating an
export powerhouse. But it can also threaten stagnation of research
and development and make prices creep up at home, said Gregory
Sanders, a deputy director at the Center for Strategic and
International Studies, a Washington-based think tank. The merger
partners said they'd expand research spending.
"There are a lot of countries that encourage mergers because
they're primarily focused on export markets," he said. "But from
the U.S. perspective that always has to be weighed against the
domestic market. Much of what we're producing is for the U.S.
market."
A market behemoth may be good at selling hardware, but fewer
competitors mean that prices across the board can go up, which can
be a problem for the main customer: the U.S. taxpayer. Mr. Kennedy
said one-half the $1 billion in annual benefits from the merger
would accrue to customers, most of it via lower prices for the
Pentagon.
--Thomas Gryta and Ben Kesling contributed to this article.
Write to Cara Lombardo at cara.lombardo@wsj.com and Doug Cameron
at doug.cameron@wsj.com
(END) Dow Jones Newswires
June 10, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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