NEW YORK (Reuters) – Investors and Boeing Co gave two thumbs down on Tuesday to aerospace and industrial company United Technologies Corp (UTX.N) $23 billion plan to buy avionics maker Rockwell Collins Inc (COL.N).
The acquisition, announced on Monday, would be the largest in aerospace history and create a new player in the top echelon of suppliers to Boeing, Airbus, Bombardier (BBDb.TO) and other plane makers.
United Tech shares were down 5.2 percent after Boeing said it would and use the power granted by its contracts with the companies, and its sway with regulators, “to protect our interests.”
The stock had fallen more than 4 percent before Boeing’s statement, as analysts factored in United Tech’s decision to halt share buybacks for three to four years and earnings dilution caused by the cash-and-stock deal. Analysts expected $2 billion in buybacks in the second half of 2017 alone.
The loss of years of buybacks and Boeing’s unusual blowback came as plane makers are pressing United Tech and other suppliers for price cuts and trying to compete against them on high-margin services and spare parts.
By making more of the components used on each Boeing and Airbus SE (AIR.PA) aircraft, analysts say, United Technologies-Rockwell Collins would gain leverage to resist that pressure.
United Tech Chief Executive Greg Hayes, who would lead the combined company, brushed aside Boeing’s concerns.
“The whole idea of this deal is to be able to drive more innovative solutions at lower cost for our customers – both the (plane makers) and the airlines,” Hayes told Reuters on Tuesday, shortly before Boeing issued its criticism.
Rockwell’s skill with software combined with United Tech’s expertise in numerous aircraft components allows the company to offer new “digital” products that airlines want, he said.
“We’ll be able to do predictive analytics that many others can’t do, and that’s how you add value to airline customers,” Hayes said, referring to data-crunching that allows airlines to spot problems in engines and other components before they fail.
HAYES ASSURED ENDERS
Hayes said he had assured Airbus CEO Tom Enders that United Tech’s Pratt & Whitney unit will stay on track to deliver between 350 and 400 jetliner engines this year.
United Tech fell behind on engine deliveries this year due to production problems, and Airbus raised concern last week about the deal distracting United Tech.
“Pratt has nothing to do with this,” Hayes said, noting United Tech’s aerospace unit, not Pratt, will combine with Rockwell Collins to create Collins Aerospace.
Hayes also knocked down speculation that the purchase would prompt United Tech to spin off its Carrier air conditioner or Otis elevator units, saying the company needs their cash flow to help pay down debt from the deal.
But Hayes did not rule out such sales in the longer term.
“After the deal is done, and after we pay down some debt, we’re going to go back and look,” he said.
If the company’s share price does not reflect its value, he said, “we’ll need to do something.”
United Tech could sell “non-core pieces” such as home security in the meantime, Hayes said. But given taxes and lost earnings, “it’s hard to make financial sense out of those transactions” unless they fetch a high price, he said.
Rockwell’s shares rose 0.3 percent to $131.00 in afternoon trading. United Tech shares, part of the Dow Jones industrial average .DJI, fell 5.2 percent to $111.82.
“We see limited upside near term as share repurchase is withdrawn and deal timing becomes an investor focus,” analyst Jeff Sprague at Vertical Research Partners said in a note.
United Tech’s engines and systems portfolio has little overlap with the avionics, seats and interiors businesses of Rockwell, which Hayes said should mean little trouble during the necessary regulatory review.
The combination, if successful, would mark the rise of a second engines-to-seating supplier, after jet-engine maker Safran SA’s (SAF.PA) pending $7.7-billion deal to buy seat maker Zodiac Aerospace (ZODC.PA). Safran said on Tuesday it would look at assets that might come up for sale after the United Tech-Rockwell deal.
United Tech expects to borrow $15 billion and will assume $7 billion in Rockwell debt to fund the deal, which is expected to close by the third quarter of 2018.
United Tech said the acquisition would add to earnings in its first full year and yield at least $500 million in cost savings by the fourth year of operation.
Additional reporting by Lewis Krauskopf, Tim Hepher and Mike Stone; Editing by Nick Zieminski and Meredith Mazzilli