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United Technologies Deal Strategic but Pricey

After acquiring narrow-moat Rockwell Collins, wide-moat United Technologies will increasingly trade like an aerospace stock and generate roughly 60% of its 2019 revenue from aerospace and defense.

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On Sept. 4,

We think this move makes strategic sense because it broadens United Technologies’ aerospace portfolio, which remains highly dependent on the geared turbofan engine. However, the deal seems a touch expensive--the enterprise value/EBITDA multiple is close to 14 times, compared with around 13 times for other large aerospace deals per PitchBook. Cost synergies are pegged at $500 million. United Technologies delivered $500 million in cost savings on its 2012 Goodrich acquisition, which was about 6% of Goodrich’s operating costs. Based on this, the $500 million looks realistic but a bit of stretch since it equates to a slightly higher percentage (7%) of Rockwell’s total operating costs. We also think Rockwell is very well run and cost savings may prove difficult to find.

We believe United Technologies will increasingly trade like an aerospace stock and estimate it will generate roughly 60% of its 2019 revenue from aerospace and defense. This makes us question what’s in store for Otis and CCS, which we forecast at lower growth rates (but higher margins) than the aerospace businesses. We were thinking a United Technologies breakup might accompany this deal, so we’re anticipating more color on the portfolio during the Sept. 5 call to discuss the acquisition.

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About the Author

Chris Higgins

Senior Equity Analyst
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Chris Higgins, CFA, is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers aerospace and defense companies, airports, and airlines.

Before joining Morningstar in 2015, Higgins spent eight years working for Airbus Group in both the United States and Europe. While at Airbus Group, he held a variety of positions, ranging from corporate development to investor relations.

Higgins began career in strategy consulting, where he consulted leading U.S. and European aerospace and defense prime contractors. During his time in consulting, he led teams that solved business challenges ranging from merger and acquisition decisions to new product launches.

Higgins holds a bachelor’s degree in economics from Rhodes College, where he graduated as a member of Phi Beta Kappa, and a master’s degree in finance from The Henley Business School in the United Kingdom. He also holds the Chartered Financial Analyst® designation.

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