Introduction
United Technologies (UTX) and Raytheon (RTN) released their joint merger prospectus on September 10. As a reminder of what current shareholders will receive if they hold their shares until the merger closes:
Raytheon shareholders will receive 2.3348 shares of a company to be named Raytheon Technologies (NYSE:RTX). This company will consist of all of current Raytheon plus the current aerospace businesses of United Technologies.
UTX shareholders will receive one share of the new RTX, plus shares of each of the spin-off companies Otis and Carrier. While the prospectus does not specifically say one share each of Otis and Carrier per share of current UTX, every current UTX shareholder will have the same percentage ownership of the new spin off companies as they currently have of UTX.
I previously analyzed this spinoff/merger in June, in the article “United Technologies: Buying Otis and Carrier at a Discount”. At the time, I used 2019 guidance from UTX with my own overviews to make a more conservative valuation of Otis and Carrier. I also had to make some assumptions on how debt, interest rates, and taxes would be allocated among the three companies. The merger prospectus helps firm up these assumptions as we now have actuals for 1H 2019 and an estimate from UTX of how much debt will be loaded onto the spinoff companies. Based on the data in the merger prospectus and valuations of comparable companies, I value United Technologies shares at about $158, or a 16% premium to where they traded on 9/27. Also, by comparing similar aerospace and defense companies, I estimate that Raytheon is trading near fair value based on the merger exchange ratio of 2.3348 new RTX shares for each current RTN share. Therefore the value opportunity in UTX is predominantly due to undervaluation of Carrier and Otis.
