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China on Friday approved the purchase of Rockwell Collins (COL) by United Technologies. The news was more than the most important development related to a transaction on a shorter trading day: this has implications for a large number of industrial and aerospace players.
Most immediately, the decision brings the
United Technologies
(ticker: UTX) portfolio review becomes the priority again. Recall that Dan Loeb's Third Point Capital took a position in the shares of United Technologies in the first quarter of 2018. Loeb believes that it is very useful to split United Technologies into three parts: an aeronautical activity, a climate control operation and a silo company.
Shares of United Technologies closed at $ 3.33, or 2.65%, an increase to $ 129.04;
Rockwell Collins
(COL) increased $ 11.96, or 9.2%, to $ 141.63.
United Technologies said in March that once the agreement with Rockwell Collins (COL), management would "begin to review the portfolio, the entire portfolio". This means that analysts will start producing summary reports that attempt to value each company on a standalone basis, as well as together.
United Technologies is trading 10.6 times the estimated Ebitda (earnings before interest, taxes, depreciation and amortization) next year. This is true for other aerospace suppliers, but as Loeb noted, United Technologies is not limited to aircraft parts. Lennox, a player in the fight against climate change, negotiates 14 times the Ebitda and Finnish Kone lifts manufacturer 16 times.
Carrier – the climate control brand – accounts for about 30% of United Technologies' revenue, and Otis Elevators accounts for about 21% of revenue.
William Heyman, an analyst with William Blair, tells Barron he expects Carrier to be split or sold. Barron's also speculated that Carrier's spin-offs could lead to more transactions in the climate control sector.
It is unclear whether a climate agreement would satisfy the third point. Third Point was not immediately available for comment and United Technologies said it had "nothing to share for now" about the portfolio review.
If that's not enough, think about
General Electric
(GE). Everything seems to affect GE these days.
In this case, GE seeks to sell assets and raise cash in order to dispel investors' fears about its debt. The sale of a small portion of its aerospace assets may be a new option that investors have not considered. CEO Larry Culp said aviation would be part of GE's long-term future, but news highlights the value that the conglomerate could realize.
The space is hot. Mergers and acquisitions in aerospace are up this year, a lot. With the conclusion of the Collins Agreement, aerospace and defense transactions will exceed $ 40 billion in 2018. This is an average of approximately $ 20 billion per year for each of the four years preceding.
And there are many buyers for aerospace assets. same
Boeing
(BA) is interested in parts now. Boeing bought this year the KLX aerospace parts distributor as part of its new strategy of expanding beyond aircraft manufacturing.
Boeing may have an interest in the GE Avionics business, which GE bought in 2007. GE Avionics is a 50/50 joint venture with the Chinese COMAC aircraft manufacturer, which provides flight systems on the unique C919 corridor. The link with COMAC may not prevent Boeing from taking a look at the avionics unit; Boeing may wish to link with China's aerospace program.
Boeing could also look at two smaller companies for which the Ministry of Justice is asking United Technologies to divest itself in order to conclude the contract with Collins. The company did not immediately respond to a request for comment.
It is probably no coincidence that China has approved the agreement this week just before the G-20 meetings.
Political tensions have worried investors since United Technologies agreed to buy Rockwell Collins in September 2017. President and CEO Greg Hayes reassured United States third quarter results conference call last month. indicating that "we do not see [United Technologies] as being caught in the Sino-U. S. political issues. "
In reality, politics has not denied this deal, but approval may well be an olive branch for US authorities after months of exacerbated trade rhetoric. China was the last country to approve the merger for antitrust reasons.
A $ 30 billion transaction is important for the aviation industry, but the fact that the merger is about to be completed is a big problem for other reasons. This could lead to a cascade of consequences that will be felt throughout the industrial value chain.
Write to Al Root at [email protected]
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