United Technologies Deal Strategic but Pricey

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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