United Technologies Buys Defense Giant Raytheon

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United Technologies agreed to buy Raytheon in an all-stock deal, forming an aerospace and defense giant with $74 billion in sales in one of the industry’s biggest transactions ever, Bloomberg reported.

The new entity will be called Raytheon Technologies, when the deal closes in the first half of 2020, after United Technologies completes the separation of its Otis elevator and Carrier air-conditioner businesses, the companies said in a statement Sunday. While billed as a merger of equals, current United Technologies shareholders will own most of the company after the transaction, which has an equity value of $86 billion, according to data compiled by Bloomberg.

The combination “will define the future of aerospace and defense,” United Technologies Chief Executive Officer Greg Hayes said in the statement. The bigger company will combine United Technologies’ Pratt & Whitney F-35 fighter jet engines with Raytheon’s Patriot missile-defense products and expertise in areas such as radars, munitions and cybersecurity, Bloomberg adds.

Both companies’ shares stand to benefit because of the potential synergies, which could free up capital that may be deployed, Jefferies wrote in a note.

In pre-market trading, United Technologies rose 6.5% to $140.70, while Raytheon was 2.8% higher at $191.16. Each advanced more than 20% this year through June 7, in line with a Standard & Poor’s index of aerospace and defense manufacturers.

United Technologies makes both commercial and military engines, while Raytheon is focused most on defense, according to Rothacker.

Hayes will hold the CEO job in the combined organization, while Raytheon CEO Thomas Kennedy will become the executive chairman. Hayes will ascend to both roles three years after the deal closes.

Under terms, Raytheon shareowners will receive 2.3348 shares in the combined company for each Raytheon share they hold. When the dust settles, shareholders of United Technologies will own approximately 57% of the new firm on a fully diluted basis while Raytheon’s will own approximately 43%. Raytheon will contribute seven of the 15 board positions, including the lead director.

United Technologies isn’t paying a premium for Raytheon, taking into account the separation of the Otis and Carrier businesses, according to a person familiar with the matter, who asked not to be identified because the information is private.

The blockbuster deal caps a dramatic revamp of United Technologies under Hayes, who took the reins at the industrial conglomerate in 2014 with a vow to pursue big transactions. Along with last year’s $23 billion acquisition of aircraft-parts supplier Rockwell Collins, the Raytheon deal remakes United Technologies as an aerospace giant with products including not only jet engines and missiles but other items like cockpit electronics and radars.

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