Raytheon Co. (RTN, Financial) and United Technologies Corp. (UTX, Financial) announced on Sunday the two companies entered into an agreement to combine in a merger of equals, creating a premier systems provider within the aerospace and defense industry.
Per the merger terms, Raytheon shareholders will receive 2.3348 shares in the combined company per common share owned. United Technologies shareholders, which include activist investors Bill Ackman (Trades, Portfolio) and Daniel Loeb (Trades, Portfolio), are expected to own 57% of the combined company on a fully-diluted basis.
Strategic rationale
Raytheon CEO Tom Kennedy and United Technologies CEO Greg Hayes listed several cost and revenue synergies for the merger, including complementary technology and research and development platforms. Management of both companies expect the combined company to generate $74 billion in pro forma 2019 sales and return between $18 billion and $20 billion in capital to shareholders in the first 36 months after the deal closes.
Raytheon expects to consolidate its business segments into two businesses: Intelligence, Space and Airborne Systems; and Integrated Defense and Missile Systems. United Technologies’ two business segments, Collins Aerospace and Pratt & Whitney, represent the combined company’s other two segments. The 15-member board of directors, which include eight directors from United Technologies and seven from Raytheon, expect the merger combination to close in the first half of 2020, subject to shareholder and regulatory approval.
Ackman comments on United Technologies
Ackman said in his March quarterly letter that United Technologies “demonstrated strong growth across its businesses” during the quarter, with organic revenues increasing 8%. The company said it remains on track to complete the separation of Otis and Carrier, the two businesses not included in the merger combination, by the expected closing date. The Pershing Square fund manager continues to believe that United Technologies’ separation serves as a “catalyst” for price appreciation as investors “begin to value each of UTX’s businesses separately.” During the quarter, Ackman added 241,000 shares of United Technologies, increasing the position 4.32%. Shares averaged $120.52 during the quarter.
GuruFocus ranks United Technologies’ profitability 7 out of 10: Although the company’s operating margins are outperforming 82.76% of global competitors, margins have contracted 3.6% per year over the past five years. Additionally, United Technologies’ three-year revenue growth rate of 5.80% outperforms just 59.12% of global aerospace and defense competitors.
Disclosure: No positions.
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