iShares U.S. Aerospace & Defense ETF (ITA - Free Report) , SPDR S&P Aerospace & Defense ETF (XAR - Free Report) and Invesco Aerospace & Defense ETF (PPA - Free Report) were in green on Nov 23, rising 0.7%, 0.6% and 0.6%, respectively. The move was buoyed by the news that China’s regulators have approved United Technologies’ (UTX - Free Report) purchase of aircraft parts’ manufacturers, Rockwell Collins . The two companies are involved in a $30 billion deal. The proposed acquisition was announced on Sep 4, 2017 and per the press release on Nov 23, is expected to close within three business days.
Per the deal, which was announced in September last year, Rockwell shareholders will get $140 per share, which will be split into $93.33 in cash and the remaining $46.67 in stock of United Technologies (read: Aerospace and Defense ETFs Dip Despite Strong Q3 Earnings).
The approval comes at a time when there is escalating trade tension between Washington and Beijing. Many felt that that the deal could be a victim of the same as recently, China did not approve Qualcomm’s (QCOM - Free Report) attempt to buy NXP Semiconductors N.V. (NXPI - Free Report) . Chinese regulators had put the approval on hold from September last year.
This regulatory clearance was the final hurdle to close the deal, which happens to be the biggest-ever takeover in the aerospace and defense industry. United Technologies manufactures Otis elevators, Pratt & Whitney engines and is a supplier of parts to large aircraft manufacturers Boeing and Airbus. This deal allows United Technologies to enjoy cost savings and the greater combined strength increases its capacity to negotiate with the clients.
United Technologies and Rockwell Collins had to satisfy certain regulatory mandates to get the approval. Per China’s State Administration for Market Regulation, Beijing has asked both United Technologies and Rockwell for disposal of certain assets and regulators have also specified requirements in relation to the supply of aircraft components to the country (read: What Tech Crash? Tap Online ETFs for Black Friday & Beyond).
U.S. and European approvals were received beforehand. Europe’s competition supervisory body had asked United Technologies to sell businesses related to actuators, pilot controls, ice protections and oxygen systems. For securing approval in the United States, United Technologies agreed to dispose two Rockwell Collin’s businesses, which include a business that de-ice planes and another which sells trimmable horizontal stabilizer actuators, helping the aircraft maintain altitude.
Lately, United Technologies was facing pressure from activist shareholders for a split-off in the company’s business. This was confirmed last month when officials from the company said that they were entertaining third party interests for acquiring a few of their divisions. The acquisition of Rockwell Collins could clear the way for the reconstruction process needed ahead.
Below we highlight the above-mentioned ETFs in detail that saw positive pricing action on Nov 23 (see: all the Industrials ETFs):
This fund provides exposure to U.S. companies that manufacture commercial and military aircraft and other defense by tracking the Dow Jones U.S. Select Aerospace & Defense Index. It comprises 37 securities, with United Technologies occupying the second spot (8.9%). The fund’s AUM is 5.2 billion and expense ratio is 0.43%. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
The fund seeks to track a modified equal-weighted index, which provides the potential for unconcentrated industry exposure across large, mid and small-cap stocks. It comprises 34 holdings with United Technologies sitting in the third position (3.9%). The fund’s AUM is $1.4 billion and expense ratio is 0.35%. It currently has a Zacks ETF Rank of #2 with a Medium risk outlook (read: Trump's Presidential 2 Years: Must-See ETF Areas).
The Invesco Aerospace & Defense ETF is based on the SPADE Defense Index. The index comprises 50 companies that are mainly engaged in the research, development, manufacture, operation and support of defense, military, homeland security and space operations. The fund has AUM of $897.1 million and expense ratio of 0.61%. It comprises 53 holdings with United Technologies occupying the first position (7.3%). It currently has a Zacks ETF Rank #2 with a Medium risk outlook.
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