United Technologies For Rockwell Collins: Deal Or No Deal?

It has been roughly a month since reports of a potential merger between United Technologies Corporation UTX and Rockwell Collins, Inc. COL first surfaced. Merger rumors have heated up this week, with the Wall Street Journal reporting a buyout price of $140 or less for Rockwell Collins.

It has been an eventful past few years for United Technologies, including the sudden departure of the company’s CEO in 2014, the sale of Sikorsky, an abandoned merger with Honeywell International Inc. HON, turnaround efforts at Otis and an a major influx of new management. According to Credit Suisse analyst Julian Mitchell, none of these events have proven to be meaningful earnings drivers, and the company’s investors still have a blurry outlook about potential growth opportunities in the future.

Mitchell says a Rockwell Collins buyout could potentially provide some much-needed clarity on earnings growth. Credit Suisse estimates that the deal would result in about 14-percent adjusted EPS accretion for United by 2020. The market seems to be recognizing the value in the potential deal.

“From UTX’s standpoint, we do not think it is a coincidence that reports of this deal emerged just as the share price was nearing its highest levels since early-mid 2015, which was the last time when we think the company was seriously contemplating other large acquisition activity,” Mitchell wrote on Thursday (see his track record here).

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Mitchell said $140 per share implies a reasonable EV/EBITDA multiple of about 14x, and a deal at that price would likely involve about $5 billion in equity issuance.

If United's management doesn’t pull the trigger soon, Mitchell said the company could face “outside pressure for change” from concerned investors.

Credit Suisse maintains Neutral ratings on both United Technologies and Rockwell Collins.


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