Three messages come out of the move by United Technologies – parent company of Sikorsky, Pratt & Whitney and Hamilton Sundstrand – to rejig its plans for actually paying the $16.5 billion it’s soon going to have to lay down to close its acquisition of Goodrich.
United Technology – less the Rocketdyne technology part
One: we’re not in 2007 anymore. Back in those heady pre-crisis days, raising a quarter of the price in new equity and the rest in debt would have been normal enough to do a deal that created a commanding position in a fast-growth industry like civil aerospace. Many such deals were done, of course, and when the crisis hit it didn’t seem so wise to have taken on the debt, but that’s the value of hindsight.
So, it’s no surprise that UTC has surrendered to market unease – and fears that its credit rating would take a hit – with a new plan to raise no equity now and take much less debt by parting with some cash, raising some more by divesting a few “non-core” businesses, and issuing some bonds, convertible to equity at maturity. In retrospect, it is a surprise that the original equity-and-debt plan was settled on at all.
Two: $16.5 billion is a lot of money. This deal is perhaps the biggest aerospace industry takeover ever, and it represents a gamble by UTC. Post-deal, aerospace and propulsion revenue will be around half UTC’s total (it also owns Otis lifts and Carrier air conditioning, and is a big play in fire and security systems). As things stand, civil aerospace looks like an industry with solid long-term growth prospects, but a sluggish global economy is also a reasonable prospect, so the risk is all on the downside if it turns out (as so often it does) that extrapolating current trends leaves a wide gap between expectations and reality.
UTC has long been heavily diversified company, and while diversification isn’t every investor’s favourite flavour, UTC does hold what looks to be a basket of winners. Scale and success don’t necessarily go together, and the history of mega-acquisitions is littered with failures; company cultures often clash badly, and synergies have a habit of proving elusive. There’s lots of work ahead to make this deal a success, and it’s entirely possible that UTC and its investors will look back and think they overpaid for Goodrich.
Recall that before news of the UTC offer for Goodrich broke last September, Goodrich shares were trading for $85-90, giving it a market capitalisation of nearly $11.5 billion. On news of the talks, shared surged to $105, a market cap of some $13.5 billion. UTC is paying $3 billion on top of that.
Three: Pratt & Whitney Rocketdyne hasn’t made much noise recently, but it’ an interesting company. UTC plans to sell what it sees as a non-core and slow-growth unit it as part of a bid to raise $3 billion toward the Goodrich purchase, but it’s worth at least wondering if some valuable expertise is being let go.
True, Rocketdyne has been something of a corporate orphan for decades – spun off by North American Aviation, sucked up into Rockwell, sold off to Boeing and again in the mid-2000s to UTC. And, the end of the Space Shuttle programme’s demand for Rockwell main engines and the absence of any serious US space programme to replace it leaves the rocket engines specialist without a strong market to play its strength to.
But there’s more to Rocketdyne than big rockets. The company sells high technology to such growth industries as solar power generation, and cleverly describes itself as a “power, propulsion and optimization” company skilled at delivering highly-engineered solutions in extremely demanding environments. With no big US space programme to feed its natural order book there may be no big aerospace companies lining up to buy Rocketdyne. But it does sunds like a company you’d like to have, especially if you already own it.
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