Project Description

United Technology Spin-off Details

On November 26, 2018. United Technologies (UTX) announced that it would separate itself into three independent companies.

UTX will spin off its Climate, Controls, and Security business and its elevator/escalator manufacturing business into separate public companies. The remaining business will be 100% focused on aerospace (UTX also announced the closing of its acquisition of Rockwell Collins, an aerospace systems supplier).

Rationale for the Spin-off

Hedge funds, Third Point and Pershing Square, have taken positions in UTX and have advocated for a break up.

In addition, CEO Gregory Hayes had previously said that the board would evaluate strategic options once the Rockwell Collins deal closes.

Reasons listed in the spin-off slide deck include:

  1. Nimbler organizational and operating model supporting greater agility Improved operating discipline with more granular focus
  2. Three leading companies with scale, investment grade balance sheets and financial characteristics to drive growth and investment through cycles
  3. Capital structure and allocation flexibility to meet individual business risk / return profiles
  4. Greater flexibility for standalone businesses to pursue portfolio enhancing M&A, supported by independent equity currencies
  5. Performance incentives better aligned to the specific attributes of each business
  6. Attract shareowners with distinct investment preferences

However, I think the most important reason is valuation.

As seen in the chart below, UTX trades at a discount to its climate, controls and security peers (Honeywell and Ingersoll-Rand), elevator manufacturing peers (KONE), and aerospace peers (Transdigm and Honeywell).

Source: Ycharts, November 30, 2018

Additional Details

The spin-off will create three industry leading companies with distinct business characteristics.

UTX noted that one-time separation costs would cost $2BN to $3BN, a surprisingly high figure. Why is it so high? UTX has to separate 1,200 legal entities globally.

After initially trading up, UTX has sold off ~9% as the deal is going to take up to 24 months to complete. Thus, some analysts have argued that UTX is in deal purgatory until the spin-off happens.

Company Resources

Spin-off Webcast – November 27, 2018

Spin-off Slide Deck – November 27, 2018

Other Resources

Kone Looks at Options for Potential Thyssenkrupp Elevator Deal – May 16 , 2019

AC and Heat United States Industry Data 

Motley Fool – Here’s Why a UTX Breakup is Good for Shareholders – November 28, 2018

Bloomberg – United Technologies Sinks due to ‘Deal Purgatory’ – November 27, 2018

Bloomberg – United Technologies Plans Three-way Split – November 26, 2018

HVAC Sales are on the Rise: Will 2018 be a Record-Breaking Year? – October 1, 2018

Popular Mechanics – 30 Years in the Making, A Simple Gearbox is Poised to Change the Jet Engine  – October 16, 2015

Bloomberg – The Little Engine That Could Reshape the Jet Engine – October 15, 2015