If perception is reality, then avionics and cabin interiors leader Rockwell Collins is “in play” to be acquired, starting by multi-industrial giant United Technologies.
That was the talk within industry the weekend following late-breaking news Aug. 4 that UTC was looking to buy Rockwell. A Rockwell spokesperson declined to comment to Aviation Week; but industry observers were already buzzing.
“The key attraction of this transaction would be the lack of product overlap,” Vertical Research Partners analyst Jeff Sprague said early Aug. 5. “At UTC, Aerospace Systems and Pratt & Whitney do not have exposure to the avionics, radio, connectivity and cabin equipment and services that Collins specializes in. This has long been apparent, and when UTC was looking at Goodrich back in 2011, it was oft reported that Rockwell Collins was also being looked at as a target.”
Aviation Week contributor and industry expert Kevin Michaels told Bloomberg the same thing. “They would be investing in two of the real interesting and hot areas in aircraft today,” said Michaels, president and founder of AeroDynamic Advisory. “It completes the portfolio and there’s very little overlap.”
Bloomberg reported the alleged deal after stock markets finished regular trading Aug. 4. Sprague said if UTC were to pay $155 per share for Rockwell, a guestimate of 30% over the market-close price, he estimates a $32 billion equity-and-debt deal would value Collins at about 13.8x earned value to pretax earnings.
Still Sprague noted that resistance to any tie-up could emerge from the likes of leading aircraft OEMS Airbus and Boeing, major customers of both companies. “Perhaps more pertinently, it would also be more challenging to bully UTC/Collins into ‘Partnering for Less’ agreements, whereas smaller suppliers are easier to push around,” Sprague surmised, referring to Boeing’s Partnering for Success supply chain cost squeeze effort.
Rockwell also might resist, according to Sprague. “The company has just acquired B/E Aerospace, has just started to ramp its 737 MAX shipments, has just seen defense start to grow again, and has just seen bizjet stabilize,” he said. “With concerns over the longevity of this aerospace up-cycle having waned, we think Collins management can rightly argue that a potential acquirer is buying at a relative low point in earnings and growth.”
If the deal is consummated, UTC’s acquisition would come after a couple of years of M&A ups and downs. UTC sold Sikorsky to Lockheed Martin in 2015 and once considered buying Honeywell, before then publically having to fight off a back-at-you offer from Honeywell later in 2016. UTC Chairman, President and CEO Greg Hayes owes his position in part to a reluctance by his predecessor, Louis Chênevert, to sell Sikorsky or consider other major transactions, some industry observers have said. Until he left in 2014, Chênevert’s reputation was bolstered by his transformative acquisition of Goodrich in 2010.
The $18 billion Goodrich acquisition had been industry’s largest until Warren Buffet’s Berkshire Hathaway bout Precision Castparts for about $37 billion when it was unveiled in 2015. That means a $32 billion deal for Rockwell Collins, as supposed by Sprague, would vault near the top.
Interestingly, while UTC was known to be looking for acquisitions, indications were not for this size of a deal. On July 25, in the company’s second-quarter earnings report, Hayes told analysts UTC had a placeholder amount of $1-2 billion for M&A this year. “But as I said before, we will be opportunistic for the right deal,” he added.