We are pleased that the Board of Directors decided to split United Technologies Corp. (NYSE:UTX) (“UTC”) into three separate, focused companies. Unfortunately, the initial announcement caused confusion and created uncertainty about the free cash flow generation of newly-acquired Rockwell Collins. We believe management has largely rectified this by shortening the time to separation and providing better disclosure on Rockwell Collins’s free cash flow generation. We have urged management to quantify the elimination of stranded costs and explore a highly value-creating transaction for Carrier, and believe they are receptive to these suggestions.
Despite the separation announcement, UTC’s sum-of-the-parts discount has continued to widen and the valuation gap versus UTC’s closest multi-industry peer, Honeywell International, has reached a new 10-year high. The coming separation will shine a greater spotlight on the large valuation gap to UTC’s pure-play peers. During the separation process, we expect the management team to highlight UTC’s asset quality and to increase transparency around Pratt & Whitney’s very significant multi-year inflection in free cash flow generation.
From Daniel Loeb (Trades, Portfolio)'s fourth-quarter 2018 Third Point shareholder letter.
