Morningstar | Rockwell has agreed to sell itself to United Technologies for $140 per share.
United Technologies plans to acquire Rockwell Collins for $140 per share ($23 billion equity value plus $7 billion in assumed debt). We believe the deal will not face regulatory roadblocks due to limited product overlap. We also think United Technologies has a proven ability to close large deals (for example, $18.4 billion for Goodrich in 2012). We're assuming the deal closes in 2018, noting that the equity value paid for Rockwell can fluctuate subject to a two-way collar on United Technologies share price of $107.01 (Rockwell shareholders will receive 0.376525 shares of United Technologies stock) and $124.37 (0.43613 shares received).Rockwell produces avionics, flight control, communication, and navigation systems that, once sourced, enjoy high switching costs and strong margins. The company recently closed its $8.6 billion acquisition of B/E Aerospace, expanding into the aircraft cabin and seat manufacturing. Rockwell drives commonality across its defense and commercial businesses to minimize R&D and recurring costs. It spends about 20% of sales on R&D annually and historically 60% of this is customer-funded. The company historically operated through three segments: commercial systems, government systems, and information management services. Commercial systems generated 46% of 2016 sales, government systems generated 42%, and information management services accounted for the remainder. B/E will operate as a new segment named interior systems. In business jets, the firm has significant content on Bombardier aircraft. Rockwell and Honeywell compete in large business jets, while Garmin is active in the lower end. In regional jets, Rockwell is on Bombardier’s C Series and Mitsubishi’s regional jet. Rockwell also has content on the ARJ-21, a regional jet developed by Comac. In commercial aircraft, Rockwell faces Honeywell on Boeing planes, and on Airbus aircraft Rockwell competes with Honeywell and Thales. Rockwell is on the 777X, 787, 737-MAX, and A350. The 737 MAX will be the largest program once in full production. The military business is more competitive, but Rockwell enjoys a cost advantage from its integrated commercial/military model.Rockwell Collins designs, produces and supports communications and aviation systems for commercial and military customers and provides information management services through voice and data communication networks and solutions worldwide. The company also provides a range of services and support to its customers through a network of service centers, including equipment repair and overhaul, service parts, field service engineering, training, technical information services and aftermarket used equipment sales. As of Sept 30 2017, the company served customer through its Interior Systems, Commercial Systems, Government Systems and Information Management Services operating segments.
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