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Raytheon, United Tech to Merge: Aerospace ETFs in Focus

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A leading aerospace company United Technologies and a leading defense contractor Raytheon Company RTN are looking to combine their business in an all-stock merger of equals. The combination will create a new company worth $121 billion in what would be the sector’s biggest merger ever.

The deal will reshape the competitive landscape by forming a conglomerate that spans commercial aviation and defense procurement. United Technologies provides primarily commercial plane makers with electronics, communications and other equipment whereas Raytheon supplies the U.S. government with military aircraft and missile equipment (read: Space ETFs: Invest in the Final Frontier).

Inside The Deal

Under the terms of the deal, Raytheon shareowners will receive 2.3348 shares in the combined company for each Raytheon share. The transaction, which was approved by the boards of directors of both companies, is expected to close in the first half of 2020 after United Technologies completes the previously announced separation of its Otis and Carrier businesses, which is on track for completion in the said time frame. Upon completion of the merger, United Technologies shareowners will own approximately 57% and Raytheon shareowners will own approximately 43% of the combined company on a fully diluted basis.

The combined company will be called Raytheon Technologies and would be the world's second-largest aerospace-and-defense company by sales after Boeing BA with annual revenues of $74 billion. Given its strong balance sheet and robust cash generation capability, Raytheon Technologies will enjoy enhanced resources and financial flexibility to support significant R&D and capital investment through business cycles.

The newly created company is expected to return between $18 billion and $20 billion of capital to shareholders in the first three years after the completion of the deal, and will also assume about $26 billion in net debt. The merger is expected to result in more than $1 billion in cost synergies by the end of the fourth year, with approximately $500 million in annual savings returned to customers (read:  Aerospace and Defense ETFs Rally on Strong Q1 Earnings).

Market Impact

Following the announcement of the deal, shares of UTX climbed 6.5% in an early pre-market trade and RTN gained more than 1%. This has put the spotlight on aerospace and defense ETFs that could be the best ways for investors to tap the opportunity arising from the Raytheon-United Technologies deal (see: all the Industrials ETFs here).

iShares U.S. Aerospace & Defense ETF ITA

This fund provides investors exposure to the broad aerospace and defense industry by tracking the Dow Jones U.S. Select Aerospace & Defense Index. Holding 34 stocks, UTX and RTN take the second and ninth spots in the basket, respectively, with a combined 21% of the assets. The fund has accumulated $5 billion in AUM while charging 43 bps in fees a year. Volume is good at around 265,000 shares. The product has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

SPDR S&P Aerospace & Defense ETF XAR

This product offers equal-weight exposure to the industry’s large, mid and small-cap stocks. It follows the S&P Aerospace & Defense Select Industry Index, holding 31 stocks in its basket. Both United Technologies and Raytheon make up for at least 3.7% share each. The product has been able to manage $1.4 billion in its asset base while trading in average daily volume of around 159,000 shares. It charges 35 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.

Invesco Aerospace & Defense ETF PPA

This ETF offers exposure to 48 companies that are involved in the development, manufacturing, operations as well as support of U.S. defense, homeland security and aerospace operations. It tracks the SPADE Defense Index, charging 60 bps in annual fees from investors. The fund has amassed $963.6 million in its asset base while trading in moderate average daily volume of under 72,000 shares. UTX occupies the second position in the fund’s portfolio at 6.7% while Raytheon holds the sixth spot at 5.4% share. The product has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: ETFs From Top and Flop Zones to Start May).

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