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United Technologies seen using Sikorsky cash for deals, stock

Unloading Sikorsky Aircraft for $9 billion may set up United Technologies Corp. for more deals.

With the accord to sell the maker of Black Hawk helicopters to Lockheed Martin Corp., Chief Executive Officer Gregory Hayes gets funds he can use for acquisitions, according to Peter Arment, a Sterne Agee CRT analyst. While the company said it plans to pay for buybacks, Hayes has said he is on the hunt for deals.

“They’re going to continue to transform their portfolio,” Arment said Monday in a telephone interview. “This is the first of what is going to be a lot of changes to what United Technologies is going to look like when we get it in 2016.”

United Technologies’ targets may include building-services companies, including lockmaker Allegion or electrical-products manufacturer Hubbell Inc., said Julian Mitchell, an analyst at Credit Suisse Group. Fire-detection and security giant Tyco International, with a market value of $16 billion, is “plausible, albeit less likely,” he said in a note.

“Acquisitions are likely to pick up,” wrote Mitchell, whose outperform rating on United Technologies is equivalent to Arment’s buy. United Technologies’ main businesses are jet engines, aerospace parts and building systems, and with limited opportunities to boost margins, making a purchase “fairly appealing.”

The sale of Sikorsky caps a review begun after Hayes was named CEO in November. Making military and civilian rotary-wing aircraft is a fundamentally different business from Pratt & Whitney turbines, Otis elevators and Carrier air conditioners, a point Hayes emphasized amid months of public discussion about whether the helicopter unit would be sold or spun off.

Sikorsky’s performance has lagged behind other United Technologies divisions for years. Sales of $7.45 billion in 2014 produced $219 million in operating income, for an operating margin of 2.9 percent. Otis, the next-largest unit, had $13 billion in sales and a 20 percent operating margin.

Lockheed said tax benefits from the Sikorsky transaction will reduce the effective price of Sikorsky to $7.1 billion. For United Technologies, after-tax proceeds will be $7.5 billion to $8 billion, Nicholas Heymann, a William Blair & Co. analyst, said in a note. It’s the largest aerospace acquisition since 2012, when United Technologies bought Goodrich Corp. for more than $16 billion.

Along with the Sikorsky deal, United Technologies’ board approved a plan to repurchase as many as 75 million shares, or about $8.3 billion based on July 17’s closing price.

Hayes, who served as chief financial officer for six years before taking over for former CEO Louis Chenevert, has said he is looking for acquisitions – potentially as large as $20 billion or more – if they meet certain criteria on returns and strategy. The company will detail its strategy and outlook in an investor call Tuesday after reporting quarterly earnings.

“They would like to make some additional acquisitions,” said Sterne Agee CRT’s Arment, who rates the stock a buy. “They have a lot of cash trapped overseas. Obviously, the international acquisitions make the most efficient tax sense. But, of course, you’ve got to be able to find those deals

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