United Technologies-Raytheon to create aerospace and defence giant

The all-stock deal will close in the first half of 2020 to form Raytheon Technologies

A sign marks the Raytheon offices in Woburn, Massachusetts. United Technologies agreed to buy Raytheon to create an aerospace and defence giant with sales of $74 billion, in one of the industry's biggest deals ever.  Reuters
A sign marks the Raytheon offices in Woburn, Massachusetts. United Technologies agreed to buy Raytheon to create an aerospace and defence giant with sales of $74 billion, in one of the industry's biggest deals ever.  Reuters

United Technologies said it agreed to buy US military contractor Raytheon in an all-stock merger of equals to create an aerospace and defence giant with sales of $74 billion (Dh272bn), in one of the industry's biggest deals ever.

The transaction is expected to be completed in the first half of 2020, after planned spin-offs of United Technologies' elevator and air-conditioning businesses. The new entity will be named Raytheon Technologies Corporation, the two companies said in a joint statement on Sunday.

"The combination of United Technologies and Raytheon will define the future of aerospace and defence,” said Greg Hayes, United Technologies' chairman and chief executive. "By joining forces, we will have unsurpassed technology and expanded R&D capabilities that will allow us to invest through business cycles and address our customers’ highest priorities."

The blockbuster deal to combine the two companies, which sent ripples through both industries, will create a powerhouse that will rank second only to Boeing and place it ahead of Airbus. The new aerospace and defence entity will produce everything F-35 engines to Patriot missile systems.

In a conference call on Monday, the companies said they do not foresee any regulatory hurdles to closing the deal or any pushback from the US Department of Defence because there is limited overlap between the two businesses. Less than one per cent of their sales overlap and their technologies are complementary to one another, they said.

The companies expect to get regulators' approval "relatively quickly" by the first quarter of 2020.

Raytheon and United Technologies said there will be no consolidation of their factories and no job cuts under the deal, with each company expecting to add about 10,000 employees.

The combined entity will ride the wave of technology growth in areas such as artificial intelligence and machine learning, they said.

The companies discussed the merger idea last summer, with talks accelerating at the end of 2018 before the companies' teams began work on it this January.

"This has been on our radar screens forever," Mr Hayes said. "The compelling logic was there."

US President Donald Trump questioned the deal on Monday, expressing worries that a merger between United Technologies and Raytheon would harm competition and make it more difficult for the US government to negotiate defense contracts.

“I’m a little concerned about United Technologies and Raytheon,” Mr Trump said in an interview with CNBC. Aerospace companies have “all merged in so it’s hard to negotiate” with them, he added.

Under the terms of the deal, Raytheon shareholders will receive 2.3348 shares in the joint company for each Raytheon share.

United Technologies shareholders will own approximately 57 per cent of the new business and Raytheon share owners will own around 43 per cent of the combined company.

Mr Hayes will be named the chief executive of the new entity, while Raytheon chief executive Tom Kennedy will be appointed its executive chairman. Two years following the close of the transaction, Mr Hayes will also assume the role of chairman.

Raytheon will control seven of the 15 board positions, including the lead director.

The merger will result in more than $1bn in gross annual cost synergies by the end of the fourth year as well as new revenue opportunities from combined technology, the companies said.

The new company will generate capital returns to shareholders of between $18bn to $20bn in the first three years after the merger is completed, according to the companies.

The combined entity's net debt at the time of closing the deal is expected to be about $26bn, of which about $24bn will come from United Technologies, the companies said. The new company targets an "A" credit rating at the time of closing the deal.

There is no change to either Raytheon’s or United Technologies’ financial outlook for 2019, according to the joint statement.

Raytheon Technologies will be headquartered in the greater Boston metro area. Currently, United Technologies is based in Farmington, Connecticut, while Raytheon’s headquarters is in Waltham, Massachusetts.

Citigroup Global Markets was the financial adviser to Raytheon while RBC Capital Markets provided a fairness opinion and Shearman & Sterling was legal adviser to Raytheon.

Morgan Stanley, Evercore and Goldman Sachs were financial advisers to United Technologies. Wachtell, Lipton, Rosen & Katz was its legal adviser.

Updated: June 10, 2019 06:06 PM


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