News of a merger between Raytheon (NYSE:RTN) and United Technologies (NYSE:UTX) (UTC) initially sent both stocks higher in Monday trading, though UTX has since pulled back. The deal will combine a defense business and an industrial conglomerate with a foothold in both the defense and commercial aircraft industries. While this deal brings changes to holders of both Raytheon stock and UTX stock, the combined entity should bring more focus while increasing the size of the new company’s customer base.
Under terms of the deal, UTC will merge its Collins Aerospace and Pratt & Whitney aircraft engine businesses with Raytheon Company. Analysts expect this new company, which they will call Raytheon Technologies, to have a value of about $121 billion. It will also become the aerospace industry’s second-largest company, lagging only Boeing (NYSE:BA) in size.
They expect to begin with about a 50-50 split between commercial and defense-related sales. However, as defense growth slows, the commercial side could grow larger over time.
A “Merger of Equals” Defines the New Raytheon Stock
Both companies consider it a “merger of equals,” as it will include no takeover premium. UTX stockholders will own 57% of the company and appoint eight of the 15 directors. Holders of Raytheon stock will receive 2.3348 shares in the new company for every share currently owned. UTC CEO Greg Hayes will become CEO of the company. Current Raytheon CEO Tom Kennedy will take the role of executive chairman for two years.
Wall Street predicts the deal will close sometime in 2020. UTX will also have to spin off its non-aerospace businesses. As part of the deal, it will sell the Otis Elevator Company. It also will unload its UTC Climate, Controls, & Security subsidiary. This division owns HVAC manufacturer Carrier and Kidde, who makes smoke alarms and carbon monoxide detectors.
Deal Bolsters the Case for RTN Stock
I see this as a win for investors. With the merger, Raytheon stock will benefit from having an outlet outside of the defense industry with which it can apply some of its technology. For now, analysts predict earnings increase for RTN stock of 14.7% this year. As increases in defense spending continue to slow, this gives Raytheon an outlet for growth not dependent on government largesse.
Holders of UTX stock will also benefit. Wall Street predicts only 4.9% profit growth for United Technologies this year. However, in the previous quarter, UTX stock saw its largest revenue increases in the divisions it will retain. Hence, spinning off low-growth segments such as Otis and Carrier should lead to greater revenue increases.
Also, the two firms have little overlap in terms of business lines. UTC produces engines and parts for aircraft. Raytheon focuses on missiles. Hence, most analysts believe the deal will gain the approval of antitrust regulators.
Moreover, this offers investors a defense-related alternative to Boeing. Thanks to this deal, investors now have another diversified aerospace company from which to choose. Analysts see no signs Raytheon Technologies will suffer from the sort of trouble Boeing has, with its 737 MAX issues.
Further, it represents a further move away from industrial conglomerates. This helps reassure current holders of UTX stock that they will not become a mishmash of unrelated businesses like the GE (NYSE:GE) of past decades. It will also help the company keep up with Honeywell (NYSE:HON), which has also increased its focus. These benefits should help bolster the RTN stock price.
Concluding Thoughts on the Merger
The new Raytheon stock will offer investors the best of both Raytheon and United Technologies, increasing the focus while broadening the customer base. With the merger, Raytheon gains two divisions as well as a foothold in the commercial side of the business. Holders of UTX stock get a more focused aircraft and aerospace company. They will also benefit from not owning a stock held back by lower-performing, unrelated divisions.
Both stocks moved higher after the companies announced the deal. This march should likely continue as the new Raytheon more directly challenges Boeing in both defense and commercial aerospace.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
