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United Technologies Corp. agreed to purchase Raytheon Co. as part of a stock transaction, forming an aerospace and defense giant with $ 74 billion in sales during one of largest transactions in the industry.
The new entity will be called Raytheon Technologies Corp. at the end of the transaction, in the first half of 2020, after United Technologies will have completed the separation of Otis lift truck and Carrier air conditioners, the companies said in a statement Sunday. Although billed as a merger of equal, the current shareholders of United Technologies will hold the bulk of the company after the transaction, which represents a value of $ 86 billion, according to data compiled by Bloomberg.
The combination "will define the future of aerospace and defense," United Technologies chief executive officer Greg Hayes said in a statement. The largest company will combine United Technologies' Pratt & Whitney F-35 combat aircraft engines with Raytheon's Patriot missile defense products and expertise in areas such as radar, ammunition and cybersecurity.
The shares of the two companies should benefit because of potential synergies, which could free up capital that could be deployed, wrote Jefferies in a note.
With respect to pre-market trading, United Technologies grew 6.5% to $ 140.70, while Raytheon was up 2.8% to $ 191.16. Each has grown more than 20% this year until June 7th, which is in line with the Standard & Poor's Index of Aerospace and Defense Manufacturers.
United Technologies manufactures both commercial and military engines, while Raytheon focuses primarily on defense, according to Rothacker.
Hayes will badume the position of CEO of the merged organization, while Thomas Kennedy, Raytheon's CEO, will become the executive chairman. Hayes will play both roles three years after the conclusion of the agreement.
Depending on the terms, Raytheon's shareholders will receive 2,3348 shares of the merged company for each Raytheon share they hold. When the dust settles, the shareholders of United Technologies will own about 57% of the new company after full dilution, while Raytheon will own about 43%. Raytheon will contribute to seven of the 15 board positions, including the lead director.
United Technologies does not pay a premium for Raytheon, given the separation of the Otis and Carrier businesses, according to someone close to the case who asked not to be identified because the information is confidential. A teleconference is scheduled for Monday morning.
Hayes Vision
The blockbuster deal marks the dramatic restructuring of United Technologies under the leadership of Hayes, who took the reins of the industrial conglomerate in 2014 with the desire to pursue large deals. With the purchase of Rockwell Collins, an aircraft parts supplier, for $ 23 billion last year, the Raytheon agreement turns United Technologies into an aerospace giant offering not only reactors and missiles but also electronic components and badpit radars.
Greater weight would increase United Technologies' ability to withstand cost pressures from customers such as Boeing Co. and Airbus SE, said Rothacker, Bloomberg badyst. The US Department of Defense is another essential client.
"Aerospace suppliers are under immense pressure from Boeing and Airbus to reduce their costs," he said. "We have seen the consolidation of the sector as a way of countering these price and competition pressures, as well as diversifying to generate additional revenue."
Another joker in the approval of the agreement: the US Department of Defense.
Hayes rejected a merger offer from Honeywell International Inc. in 2016, claiming that this transaction underestimated his business and would face opposition from his clients. Wall Street badysts were then predicting resistance from the Pentagon, as well as planners.
"We do not expect the DoD to raise strong objections against the agreement," although there may be small divestments in which overlap with companies resumed with the purchase of Rockwell Collins, wrote Sunday badyst Byron Callan of Capital Alpha Partners. Part of this overlap may not be readily apparent because programs are clbadified, he wrote.
Financial perspective
The companies will have a combined debt of about $ 26 billion at the time of the deal, including about $ 24 billion from United Technologies, the companies said in their statement. The financial perspectives for 2019 are not modified for both companies.
The companies said they plan to return $ 18 billion to $ 20 billion to shareholders during the first 36 months of the merger and realize cost savings of about $ 1 billion a year. Here the fourth year.
The headquarters will be in the Boston area. Currently, United Technologies is based in Farmington, Connecticut, while Raytheon is headquartered in Waltham, Mbadachusetts.
Citigroup Inc. was the financial advisor to Raytheon, RBC Capital Markets LLC issuing a fairness opinion and Shearman & Sterling LLP as legal counsel. On the side of United Technologies, Morgan Stanley, Evercore and Goldman Sachs Group Inc. were the financial advisors and Wachtell, Lipton, Rosen & Katz provided legal services.
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