United Technologies-Sikorsky split could be prelude to deals

Sikorsky, which makes the Black Hawk helicopter along with those that fly the president, is to be spun off by United Technologies, which also owns Goodrich.
Sikorsky, which makes the Black Hawk helicopter along with those that fly the president, is to be spun off by United Technologies, which also owns Goodrich. BLOOMBERG NEWS FILE PHOTO

United Technologies’ plan to part with Black Hawk helicopters may be only the beginning.

The $110 billion industrial conglomerate announced Wednesday that it will sell or spin off Sikorsky Aircraft, a unit valued on average by analysts at about $8 billion as a stand-alone. Cutting ties with Sikorsky – its lowest-margin business – may help United Technologies bridge the 13 percent gap between its stock price and the roughly $137-a-share value that some analysts assign to its underlying assets.

Acquisitions may be next on the agenda for United Technologies, whose biggest deal was the more than $16 billion takeover of Charlotte-based aerospace supplier Goodrich in 2012. Chief Executive Officer Greg Hayes has said he’s focusing on purchases of $5 billion or larger.

Possible targets could include lock maker Allegion at $5.6 billion or even fire-detection and security giant Tyco International at $18 billion.

This is probably not a “one and done,” said Chip Pettengill, principal and fund manager at Bahl & Gaynor Investment Counsel, which oversees about $13 billion including United Technologies stock. “There’s more to come. He will probably be looking to make some acquisitions after this.”

Hayes may only spend about $1 billion this year and could do more share buybacks instead if targets are too expensive, the CEO said Thursday at a meeting with investors in New York. Even so, the Hartford, Conn.-based company has already built up its biggest cash stockpile in about two years, and splitting off helicopter-maker Sikorsky should give it more financial firepower.

Sikorsky had about $7.5 billion of revenue last year, most of which came from defense contracts. Jettisoning it will remove a low-return business and reduce United Technologies’ exposure to the volatile U.S. military budget, said Pettengill.

Sikorsky, which makes the helicopters that carry U.S. presidents, is “as much of a stand-alone, separate business as anything they have,” he said. “It makes a lot of sense” and there’s “value creation” for shareholders.

United Technologies will review options for the business and make a decision this year on whether to sell it or spin it off. The company looked at splitting the building and industrial-systems division from the aerospace operations and decided that doing so wouldn’t unlock enough value to make the process worthwhile, Hayes said on a call with reporters Wednesday.

The compay will also use its cash – which stood at $5.2 billion at the end of 2014 – to buy back $3 billion in shares, and is moving its headquarters to Farmington, Conn. United Technologies employs about 300 at its UTC Aerospace Systems headquarters in Charlotte, and about 200 in Monroe.

United Technologies has been stumped in its dealmaking efforts by high equity prices, Hayes said at the company’s investor meeting. The Standard & Poor’s 500 Index hit another record earlier this month.

Even so, Hayes has frequently signaled an interest in pursuing deals since he took over as CEO in November and the Sikorsky split is a sign he’s not afraid of being aggressive.

“To me, if they found something, they would probably make a move for it,” said Joel Levington, an analyst at Bloomberg Intelligence.