Why A Honeywell-United Technologies Merger Is A 'Long Shot'

Shares of Honeywell International Inc. HON and United Technologies Corporation UTX have been heading north on news of merger talks. Several analysts expressed their views on the potential combination.

Cowen

Cowen’s Cai von Rumohr maintained an Outperform rating for United Technologies, with a price target of $116. He said that the successful completion of Honeywell’s bid seems to be “a long shot,” citing given regulatory and other hurdles.

Honeywell’s comments that the merger with United Technologies would yield synergies of $3.5B, no material regulatory obstacles and increased value for customers suggest that the former company may consider a hostile bid. Analyst Cai von Rumohr pointed out that the strong resistance posed by United Technologies’ CEO would make friendly deal unlikely.

“While CNBC indicated a HON advisor pegs UTX/HON overlaps at ~$4B with only $2B of likely divestitures, we come out at $15-18B of aerospace overlaps or 44-53% of aero revenues ex. large engines.”

Rumohr added that the merger would result in a significantly larger and stronger entity than any divested operations. He pointed out that in the past, the DoJ had required potential buyers to meet competitive scale requirements.

“Moreover, the EC, which rejected GE's proposed acquisition of HON in 2001, may object on the grounds of diminished competition; and given complexity of the competitive issues, regulatory review period could take 18 months,” the analyst said.

Rumohr pointed out that Honeywell’s estimate of potential cost synergies does not factor in:

1. Aggressive demands for price concession from Boeing & Airbus, which has come out against a deal
2. Major divestiture requirements
3. Impact on United Technologies’ $1.5B restructuring plan over 2015-2018, which could yield $0.9B of savings.

UBS

Analyst Shannon O'Callaghan maintained a Neutral rating for Honeywell, with a price target of $105.

O'Callaghan wrote, “In our view, the key question for Honeywell investors is, why now?... Some say it is a slow growth world and late in the cycle so Honeywell and other industrial companies need to do M&A to grow, and that is a good enough answer for buying things like Elster but not for this…while Honeywell's base case was more Elster type deals this was too appealing to not pursue.”

Nomura

Analyst Jonathan Wright maintained a Neutral rating for Honeywell, with a price target of $106. According to media reports, Honeywell was seeking a buyer for its Building Solutions unit with targeted proceeds of $3-$4bn.

Wright wrote, “In our view, a sale of Building Solutions (BS) would be consistent with Honeywell's strategy of managing the portfolio in a way that enhances margins. We think a sale of BS could improve group margins by ~100bp and contribute ~$0.15 of EPS accretion at the mid-point of the target range.”