By Doug Cameron
Questions are surfacing over how antitrust authorities will treat the tie-up between United Technologies Corp. and Rockwell Collins Inc. amid a broader debate over whether the combination will drive up costs in the aerospace industry.
Regulators, especially in Europe, are likely to be sensitive to the repercussions from the proposed takeover, announced last week, because it represents a culmination of years of smaller-scale consolidation. United Technologies agreed to purchase Rockwell Collins for $23 billion in the biggest all-aerospace deal in history, creating a powerhouse making everything from cockpit electronics to landing gear and engines.
Share-price moves since the deal's announcement indicate investors are putting a 70% probability on the transaction closing as planned by the third quarter of 2018. Rockwell Collins' stock on Wednesday traded around $131, below United Technologies' offer price of $140 a share in both cash and stock.
Industry experts say Europe's antitrust watchdog represents the biggest potential obstacle to the deal. There is relatively little overlap between the two companies -- which would have combined annual aerospace revenues of $40 billion a year -- in terms of products manufactured, a primary focus of regulators in the U.S. Other countries take nontangible considerations, such as the extent of a company's dominance in a sector or segment of a supply chain, into account.
"If there is an issue, we expect it would be in Europe and/or China, because scope, rather than just scale, matters," said Sanford C. Bernstein & Co. analyst Doug Harned.
Experts are drawing parallels between the United Technologies-Rockwell Collins deal and the planned combination of Honeywell International Inc. and General Electric Co., which the European Commission blocked in 2001. The commission's rationale was that the deal would stifle competition.
United Technologies Chief Executive Greg Hayes said last week that the companies don't expect antitrust problems given that there are only a "few hundred million dollars" in product overlap. This includes cabin interior and lighting products.
United Technologies and Rockwell Collins may make few of the same parts, but could leverage their combined buying power to squeeze their own suppliers and demand higher prices from Airbus SE and Boeing Co., as well as airlines. Mr. Harned said this could attract the European regulator's attention.
The deal requires approval from 17 regulators, reflecting the global nature of the aerospace industry. Each regulator has its own set of priorities.
Attention is also on China, whose regulators are becoming a more important factor in aerospace deals. The country accounts for around 20% of Boeing and Airbus orders, and is also developing its own commercial airliners.
Last year, Honeywell's high-profile bid for United Technologies didn't move forward, in part because United Technologies executives didn't think a deal would pass antitrust muster.
Plane makers, concerned about the clout of a super-supplier, objected to that potential combination and already have voiced opposition to the latest one.
Boeing quickly came out against United Technologies' proposed takeover of Rockwell Collins. "We remain skeptical whether that's going to add value for us," Boeing CEO Dennis Muilenburg said at an investor conference on Wednesday.
The world's biggest plane maker has questioned whether the deal would benefit customers and threatened to explore regulatory options and review existing contracts with the two companies. Boeing plans to examine whether the deal is inconsistent with "the long-term health and competitiveness of the aerospace industry supply chain."
Airbus and Boeing are pressuring suppliers to cut costs, manufacturing more parts in house and chasing the lucrative repair business. That is encouraging deal making among smaller firms.
Industry experts said the purchase of Rockwell Collins -- if approved by antitrust officials -- could trigger a round of deals among larger companies that could help spur the creation of a counterweight to Airbus and Boeing.
"I think this will be the start of more consolidation," said David Gale, head of North American industrial mergers and acquisitions at Ernst & Young LLP. "It's going to force others to broaden their products and services."
The number of transactions in the sector has already climbed over the past two years. More than 100 aerospace and defense deals were tracked in three of the past four quarters, according to Janes Capital Partners LLP. Deals numbered around 70 a quarter over the prior two years.
"The two groups forming in front of us are [United Technologies] and Honeywell," said Lou Peluso, a consultant at AlixPartners LLP. "They're going to start sucking up stuff. It's a bit of a land grab."
Write to Doug Cameron at [email protected]