United Technologies Corp. is devoting $23 billion to buying Rockwell Collins Inc. as it seeks the missing link in a broader quest by the global aerospace sector: building the digitally connected aircraft.
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Aerospace companies are investing heavily to connect everything from engines and brakes to even coffee pots equipped with sensors, allowing them to predict when they will break and ensure they are best placed to fix or replace them.
Maintenance and repairs have long been the most profitable part of the aircraft industry, prompting efforts by Airbus SE, Boeing Co. and others to secure a larger slice of the business, moves potentially threatened by United Technologies' move on Rockwell Collins.
"It gives us the opportunity to do things that we wouldn't be able to do on our own," said United Technologies CEO Greg Hayes on a Tuesday conference call. The combination with Rockwell Collins will make it easier to meet demand for digital offerings, he said, and integrate aircraft systems with benefits like reducing over all weight.
"Everything is going to become a smart device," Rockwell Collins' CEO Kelly Ortberg told investors last year.
Mr. Ortberg would become CEO of a new United Technologies unit, Collins Aerospace, with annual sales of $23 billion this year, a level of heft that some believe could make Airbus and Boeing uncomfortable.
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"This may greatly concern aircraft [makers] such as Airbus and Boeing as they confront an ever increasing proportion of their supply chain controlled by a single supplier," said Stephen Perry, managing director at Janes Capital Partners, a boutique aerospace investment bank.
Boeing adopted a tough stance on the proposed transaction, saying it was "skeptical" the combination would benefit its customers or the broader industry and threatened to drop some of its contracts with the two companies if its initial concerns were confirmed.
An Airbus spokesman said the company hopes "that this M&A will not distract UTC from their top operational priority."
Both Airbus and Boeing privately lobbied last year against plans for United Technologies to buy Honeywell International Inc., according to people familiar with the situation. However, Honeywell's $15 billion aerospace unit had far more product overlap with United Technologies.
Shares of Rockwell Collins traded at $131.55 early Tuesday, well below United Technologies' $140-a-share offer and Rockwell's recent highs. Potential antitrust action from the sheer scale of the proposed deal -- rather than product overlap -- still leave some question marks, analysts said.
The deal isn't expected to close until the third quarter of 2018 as regulatory and competitive concerns are reviewed.
United Technologies is already the world's largest aerospace supplier, with almost $30 billion in sales this year split evenly between its Pratt & Whitney engine unit and UTC Aerospace Systems, which makes everything from landing gear to the motors that control wing flaps.
Rockwell Collins would add another $9 billion in annual sales derived from its business of cockpit controls and communication equipment and this year's purchase of B/E Aerospace, the biggest provider of aircraft seats.
Mr. Hayes said United Technologies and Rockwell will have to work with customers that have change-in-control clauses in their contracts, but played down the risks. "We don't see anything that will stop this transaction from happening," he said.
The potential customer concerns stem from the great presence the new company would have on new jets. By buying B/E Aerospace, Rockwell Collins tripled the value of what it supplies for a typical wide-body jet and doubled that for narrow-body planes.
Rockwell also makes the sensors and communication systems allowing the performance of those products to be tracked in real time by airlines and other users, allowing them to decide when maintenance and spares are required.
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(END) Dow Jones Newswires
September 05, 2017 12:24 ET (16:24 GMT)