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Raytheon's Shares Up on Merger Deal With United Technologies

Zacks Equity Research

Raytheon Company RTN recently inked an all-stock merger deal with multinational conglomerate United Technologies Corp UTX. Considered to be the biggest merger in the U.S. aerospace and defense space, this deal will generate a conglomerate worth $121 billion (as per Reuters).

The combined company, to be named Raytheon Technologies Corporation, will have approximately $74 billion in pro forma 2019 sales. The deal, a tax-free one, is expected to close in the first half of 2020, following the completion of United Technologies’ earlier announced separation from its Otis and Carrier businesses.

Significance of the Deal

Per the terms of the latest agreement, Raytheon’s shareowners will receive 2.3348 shares in the combined company for each of this missile maker’s share. On completion of the merger, Raytheon’s shareowners will own approximately 43% of the combined company.

Following the completion of the deal, Raytheon’s shareholders can expect return of capital in the range of $18-$20 billion during the first three years. By the fourth year of the closure, the merger is projected to generate more than $1 billion of gross annual cost synergies.

Notably, the new company’s portfolio will comprise aerospace electronics, communications and other equipment from United Technologies along with Raytheon’s military aircraft and missile equipment. Post formation, Raytheon Technologies is certainly expected to acquire a significant position in the U.S. aerospace and defense space, by offering more cost-effective solutions backed by an expanded product portfolio.  

Other Major Deals in the Same Space

Growing need for cost-reduction initiatives, intensifying competition and increased control over production procedures have lately prompted defense industry bigwigs to engage in frequent mergers and acquisitions. Moreover, the current U.S. administration has been increasing the defense budget over the past couple of years, which have all the more enticed defense biggies to strengthen their product portfolio through mergers. We believe these factors have also played a key role in Raytheon’s latest merger deal.

Regarding mergers, it is imperative to mention that last year we witnessed a handful of similar mega deals in the U.S. aerospace and defense space. In June 2018, Northrop Grumman NOC completed the acquisition of Orbital ATK for $9.2 billion. Next, United Technologies completed the Rockwell Collins buyout for $30 billion in November 2018 to emerge as one of the world’s largest aircraft-equipment manufacturers. Such consolidations by leading industry players should improve economies of scale for the aerospace-defense equipment industry as a whole.

Price Performance

Following the latest merger deal, shares of Raytheon have gained 1.3% in the pre-market trading session. This reflects that news of this acquisition has received positive response from the market.

Zacks Rank & Key Pick

Raytheon currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the same industry is Aerojet Rocketdyne Holdings, Inc. AJRD, which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Aerojet Rocketdyne delivered average positive earnings surprise of 36.67% in the last four quarters. The Zacks Consensus Estimate for 2019 earnings has moved 18.4% up to $1.67 over the past 90 days.

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