Big Hurdles Seen for Potential United Technologies (UTX) Combo with Rockwell Collins (COL)

(Updated 12:51PM ET with WSJ story advancement)

Shares of Rockwell Collins (NYSE: COL) are gaining 3.4% Monday amid media reports Friday United Technologies (NYSE: UTX) has submitted an offer to acquire the company. While Rockwell Collins is said to have engaged an investment bank for a preliminary review of the offer, the potential deal is in the early stages, according to sources, and may not lead to a transaction.

A mid-day report Monday from the Wall Street Journal suggested United Technologies made a less than $140/share bid for Rockwell Collins and the two sides are still wrangling over a takeover price.

Analysts are mixed on the reported deal, noting it would have to be made up of at least 50% stock amid debt ratio concerns and come at a 15-30% premium. Timing is viewed as somewhat odd, but a competing bid from GE (NYSE: GE) is mostly being ruled out at this point.

Vertical Research Partners' analysts Jeff Sprague and Rob Stallard said while the logic of the ability to serve the OEMs nose to tail "sounds good on paper, as a practical matter the business doesn’t naturally operate that way, especially on large air transport." That said, there is no overlap between United Technologies and Rockwell Collins and the combination of the two would have more heft to push back against OEMs looking to extract more economics from it suppliers.

Vertical Research's analysis of the acquisition at a 30% premium assumes the deal is 50% financed by equity, with the balance from debt and available cash and cash flow. This would equal $155/share (+30% vs. the unaffected price) and would value Collins at 25x CY18 GAAP P/E, or 13.8x EV/EBITDA. They believe step two of a deal would be the separation of the building businesses through a spin-off.

Cowen's Cai von Rumohr questions if Rockwell Collins is open to a deal. von Rumohr said their unconfirmed suspicion is that Rockwell Collins' recent takeover of B/E Aerospace was motivated in part to discourage potential larger suitors like United Technologies or GE from bidding for the company. von Rumohr uses a price of $137 for COL, or a 15% premium to Friday's close. "To hold its net debt/EBITDA, which currently is 1.3x, below the 2.5x level it had in 2012 after it acquired Goodrich, its offer for COL would have to be at least 50% in stock," she notes. "At that level, we estimate the deal would be very modestly dilutive before synergies or intangibles on 2018 results. Furthermore, to integrate COL and BEAV, which already are combining systems, would entail execution and cultural risk."

Further, von Rumohr said the timing seems "odd". The analyst said one has to wonder why United Technologies didn't go after Rockwell Collins after its bid for B/E Aerospace was announced, since owning B/E Aerospace (36% of COL's sales) is likely not of great interest to United Technologies. Their guess is that this may reflect lower risk of a competing bid from GE since (1) its new CEO is early in a thorough portfolio review and (2) it has limited balance sheet capacity. In addition, United Technologies may feel that Boeing's announcement of plans to enter the avionics area may encourage Rockwell Collins to be a more willing seller.

United Technologies is not commenting on the reports. "As a matter of policy we never comment on M&A rumors or speculation," a company spokesperson told StreetInsider. Rockwell Collins has not responded to a request to comment.

You May Also Be Interested In

• Midday movers: Tesla, Li Auto and CNH Industrial fall; Salesforce rises
• Ancora Sends Important Letter to Fellow Shareholders on Norfolk Southern (NSC) Turnaround Plan
• Capri Holdings Limited (CPRI) Statement on FTC Action Seeking over Tapestry Deal