United Technologies (NYSE:UTX) recently completed its acquisition of Goodrich Corporation, strengthening its position in the global commercial aerospace industry. The acquisition, which was announced on September 21, 2011, has received regulatory approval from the US Department of Justice and European Commission, but with certain conditions.
The regulatory approvals require United Technologies (UTC) to sell Goodrich's Power Systems business, Pumps and Engine Controls business, and Goodrich's stake in Aero Engine Controls (AEC), a joint venture with Rolls-Royce. However, the AEC aftermarket business shall remain with UTC, with Rolls-Royce having the option to purchase the business in future. The conditions seek to prevent unfair practices that arise out of a dominant position held by a player in an industry.
The acquisition makes UTC one of the largest suppliers of systems and services for the aerospace industry and positions it firmly for a larger share of the growth anticipated in the commercial aerospace industry over the next couple of decades. The acquisition cost $19.4 billion, including $1.9 billion of debt, and was financed through a combination of debt and equity issuance. Goodrich generated sales of approximately $8 billion in 2011.
We currently have a stock price estimate of $102 for the company, approximately 35% above its current market price.
Goodrich's product offering
We delve deeper into the offerings of Goodrich and the advantages they bring to UTC. Goodrich's product portfolio includes systems and services for a variety of parts across the aerospace spectrum namely, commercial airplanes, fighter jets, military transport aircrafts, helicopters, submarines, unmanned aerial vehicles (UAV), and satellites and launch vehicles. Specifically, it provides aircraft landing gears, propeller systems, wheels, brakes, actuation systems, flight surfaces, aircraft air management systems and aircraft interiors. It also provides several engine components, engine control systems, and sensors and integrated systems, installed on board an aircraft.
Goodrich's current business
Goodrich supplies these systems to both original equipment manufacturers (OEMs) and the aftermarket with OEMs constituting nearly 60% of its sales and the rest by aftermarket. Its clients include nearly all the major aircraft manufacturers including, Boeing, Airbus, Bombardier and Irkut.
A strategic fit
UTC has combined Hamilton Sundstrand, which also provides a variety of systems for aircraft, with the acquired business of Goodrich to form a new division named UTC Aerospace Systems. It thus fits strategically into the product portfolio of UTC. In addition, it also strengthens the company's presence in growth markets particularly, China, India and other Asia-Pacific nations. According to estimates of Boeing, there is a $4.5 trillion jetliner market over the next 20 years for 34,000 new commercial jets. The largest portion of this demand comprising of 12,030 aircraft is estimated to come from Asia-Pacific region including China and India, followed by distant second and third of 7,760 and 7,290 aircraft from Europe and North America respectively.
Thus, we anticipate UTC to acquire a larger portion of this market on account of its strengthened position in the aerospace industry with the Goodrich acquisition.
Disclosure: No positions