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:
- Nimbler organizational and operating model supporting greater agility Improved operating discipline with more granular focus
- Three leading companies with scale, investment grade balance sheets and financial characteristics to drive growth and investment through cycles
- Capital structure and allocation flexibility to meet individual business risk / return profiles
- Greater flexibility for standalone businesses to pursue portfolio enhancing M&A, supported by independent equity currencies
- Performance incentives better aligned to the specific attributes of each business
- 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
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.
Spin-off Webcast – November 27, 2018
Spin-off Slide Deck – November 27, 2018
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
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