EUR 442.45 For Business Accounts Only

2020 Three-Way Break-Up Overview with Updated Combined Valuation

Following the trend of large industrial conglomerate break-ups (like Honeywell, DowDuPont, and GE), United Technologies Corp. (UTX) announced plans November 27, 2018 for a long-anticipated split, separating into three companies consisting of the core aerospace, elevators and building divisions. The separation is expected to be completed in 2020, creating a pure-play aerospace UTX in the process.

The Edge View (UTX, Parent ex-Spins)...
Post-Spin, UTX will primarily consist of the core Pratt & Whitney engines business and Collins Aerospace (formed after the recently concluded merger of UTC Aerospace Systems and Rockwell Collins). This post-Spins Parent company will be one of the largest players in the industry with a $39bn revenue opportunity (as per FY17 numbers). It will be a one-stop-shop for aircraft engines and aerospace systems for both commercial and military customers. We believe that the combination works well for UTX and we had previously investigated this opportunity in our Special Situations coverage of UTX in 2016 (contact us for more details). The ROC acquisition will create synergy in the long-term, but for now the engines and aerospace systems will excel under single leadership. During the recent Q3FY18 earnings, both Pratt & Whitney and Aerospace Systems drove strong organic growth amid solid aftermarket demand and a ramp-up in new engines, and that tailwind is expected to continue next year.

The Edge View (Otis & Carrier, Spinoffs)...
Both Otis and Carrier are leading players in their respective businesses; Otis is the largest player in the elevators and escalators space, and Carrier is the largest manufacturer of air-conditioning units in North America (17% market share). However, there have been recent challenges for both businesses and particularly Otis, as the segment was hit with slowing growth in China and pricing pressure from competitors. While revenue growth has picked up from negative to mid-single digits over the last year, EBIT margins at Otis have trended to the mid-teens amidst rising costs.

With Carrier things look better, and in Q3FY18 the segment reported organic growth of +7%, driven by growth in global commercial HVAC, North America residential HVAC and transport refrigeration. Additionally, we believe as the segment reconfigures its portfolio and sheds some of its non-core assets like fire safety and security, UTX (Parent ex-Spins) is a potential M&A opportunity for peers like Johnson Controls, Inc. (JCI) or Lennox International, Inc. (LII). Given the announced tax-free nature of the Spinoffs, we believe any M&A transaction will have to be presented in a tax-efficient manner, such as through an RMT (Reverse Morris Trust).