Rockwell Collins Inc. (COL - Free Report) announced that it has finally reached a definitive agreement with United Technologies Corp. (UTX - Free Report) . Per the deal, the former will be acquired by the latter for a total transaction value of $30 billion. The deal is projected to wrap up by the third quarter of 2018, depending on consents from Rockwell Collins’ shareowners and other customary closing conditions, including the receipt of required regulatory approvals.
United Technologies had submitted an offer to acquire Rockwell Collins on Aug 4.
Per the terms of the deal, United Technologies will acquire Rockwell Collins for $140 per share, in cash as well as its common stock. Each shareowner of the Rockwell Collins will get $93.33 per share in cash and $46.67 in shares of its common stock, depending on a 7.5% collar as of Aug 22, 2017 closing share price of $115.69.
United Technologies expects to fund the cash part of the transaction through debt issuances and cash in hand. The company is also dedicated to take necessary steps to maintain strong investment grade credit ratings.
The total transaction value of $30 billion reflects the total equity value of $23 billion and the balance includes Rockwell Collins’ net debt. This purchase consideration is higher than the $20 billion value estimated last week when both the companies were engaged in talks before signing the deal. (Read more: Rockwell Collins Nears $20B Deal with United Technologies)
Post Acquisition Scenario
United Technologies expects the acquisition to be accretive to its adjusted earnings per share after the first full year, following the deal’s closure. The takeover is estimated to generate more than $500 million of run-rate pre-tax cost synergies by the fourth year.
On completion, Rockwell Collins and United Technologies’ Aerospace Systems will be integrated to form a new business unit named Collins Aerospace Systems.
Benefits of the Acquisition
With the acquisition, Rockwell Collins’ commercial and military aircraft avionics business will merge with United Technologies’ wide portfolio that includes aircraft engines, structures, cockpit and cabin controls, ventilation systems and other electronic and mechanical devices used in aviation. In fact, the deal will create one of the world’s largest aircraft-equipment manufacturers.
On completion of the deal, United Technologies will burgeon to a $93 billion group as a more critical supplier of components to aircraft companies such as The Boeing co. (BA - Free Report) and Airbus Group SE (EADSY - Free Report) . Thus with the acquisition, a new aircraft bellwether will emerge, claiming a significant position in the aerospace-defense space.
Post acquisition, United Technologies is expected to have global sales of around $67-$68 billion, based on anticipated results.
The takeover will create a new giant in the space for aircraft parts makers. It is expected to emerge as the world’s fourth largest aerospace firm by revenue after Boeing, Airbus and Lockheed Martin Corp. (LMT - Free Report) . The move is intended to counter aircraft stalwarts like Boeing and Airbus, which are aiming to capture major portion of the profits earned by their suppliers. Both the aerospace biggies are putting pressure on suppliers to lower the prices and are moving into the high-margin aftermarket arena for parts and services. To this end, in July, Boeing had threatened Rockwell Collins with the warning that it will build up its own avionics business.
Notably, United Technologies will gain a strong negotiating status with the consolidation of Rockwell Collins as it will be able to manufacture as many as components required on each aircraft.
Rockwell Collins has outperformed the broader industry in the last 12 months. The company’s shares have soared 53.5% compared with the industry’s gain of 26.1% in the same period.
The outperformance may have been driven by the fact that Rockwell Collins continues to be the foremost global supplier of communications and avionics equipment for both commercial and military customers.
Rockwell Collins currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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