If Sikorsky’s Out to Bid – Who Could Be The Buyer?

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In a recent article, we explored the potential benefits for United Technologies (NYSE:UTX) if it decided to spin-off it’s only platform providing business, Sikorsky. However, United Technologies is also exploring the option of selling its rotorcraft business to a competitor, resulting in consolidation within the industry. Potential buyers of Sikorsky could include Boeing, Lockheed Martin and Textron.

We currently have a price estimate of $123 for UTC, approximately 4% ahead of its current market price.

See our complete analysis of UTC here

Sikorsky Is An Attractive Business To Purchase

Sikorsky is a leading platform provider in the rotorcraft industry, with the largest share of rotorcraft programs by OEM at 65%. Boeing comes in second with a smaller share of 25%, followed by Textron’s Bell Helicopters at 10%. [1] In terms of revenues, Sikorsky is the second largest helicopter prime in the world, trailing Boeing. [2] Sikorsky won four major contracts in 2014, including the U.S. Presidential Helicopters deal. These contract wins are cumulatively valued at approximately $13 billion, and could move Sikorsky ahead of Boeing in terms of revenues to become the largest helicopter prime in the world. [1] Bearing these facts in mind, purchasing Sikorsky is an attractive proposition to potential buyers, and it is easy to say that Sikorsky will not come cheap. It is anticipated that Sikorsky’s sale could be valued at a whopping $10 billion. [3]

Boeing: A Good Strategic And Financial Fit, But Hurdles From Regulators Will Make The Deal Increasingly Tough

Boeing has a helicopter business that is already doing well and can financially afford to purchase Sikorsky. One of its key defense program, the Apache helicopter, received full funding of over a billion dollars through the fiscal 2015 U.S. budget, supporting the remanufacture of 35 AH-64A helicopters into the the upgraded Apache AH-64D. The future of the program is looking bright as well, as the fiscal 2016 U.S. budget has set aside over $1.5 billion for the remanufacture of 64AH-64 helicopters into the Apache helicopter. [4] The addition of Sikorsky’s military as well as commercial platform would only broaden the scope of Boeing’s rotorcraft business. Sikorsky’s 2014 wins would therefore contribute to the overall growth of the rotorcraft division at Boeing. The expansion of the rotorcraft division would offset the effect of Boeing potentially losing out to Lockheed Martin in the Fighter Jets landscape and the consequent loss of revenues due to the proportionally shrinking fighter jet contracts with the U.S. government in the long run. However, regulators could make it difficult for Boeing to purchase Sikorsky. Boeing and Sikorsky are currently the two largest helicopter primes in the world. In the scenario that they join forces, Boeing and Sikorsky would control more than 80% of the U.S. military helicopter market and more than 60% of the global military market. [5]

Lockheed Martin: Financial Capacity Not An Issue, Strategic Fit A Concern

Lockheed Martin’s participation in the helicopter industry is currently limited to providing systems. Potentially purchasing Sikorsky would be a strategic shift for the company, making it a platform manufacturer. Lockheed Martin and Sikorsky have already worked together as they partner on various programs for the U.S. military. However, this does not mean that the possibility of Lockheed Martin purchasing Sikorsky is completely ruled out. Lockheed Martin currently derives over 60% of its revenues from the U.S. government. [6] In an environment where military spending in the U.S. is witnessing a decline, the opportunity to increase the share of total contracts with the U.S. government is an attractive proposition. Sikorsky’s acquisition would instantly broaden the type of work Lockheed Martin does for the U.S. military. Most importantly, Lockheed Martin has great debt capacity, and can afford purchasing Sikorsky if the strategic need is identified. [7] In the scenario that Lockheed Martin purchases Sikorsky, it could surpass Boeing to become the worlds largest helicopter prime. Lockheed Martin is already steps ahead of Boeing in the fighter jet market, and is slated to control over 50% of the global fighter jet market in the near future.

Textron’s Bell Helicopters: Great Strategic Fit But Affordability Is A Concern

Textron’s Bell helicopters unit has been underperforming. It’s key program, the V-22, has been witnessing decline in number of orders recently, making it drag Textron’s overall revenue growth. Driven primarily by lower V-22 deliveries, Bell Helicopter’s reported approximately 7% fall in revenues and 21% fall in segment profits on a year-over-year basis. [8] Potential acquisition of Sikorsky would breathe new life into Textron’s helicopter segment, bearing in mind Sikorsky’s 2014 deals valued at approximately $3 billion. Strategically, acquiring Sikorsky would add most value to Textron, and give it a push to grow in the helicopter industry. Currently, Textron ranks third in terms of share of rotorcraft programs by OEM at just 10%. It trails Boeing and Sikorsky which have 25% and 65% share respectively. ((United Technologies Sikorsky – Investor and Analyst Meeting, March 12, 2015, United Technologies)) The concern for Textron arises in the affordability of this purchase, though the strategic advantages have been identified. To be able to fund the purchase, Textron, with a market value of $13 billion, may need to take on a significant amount of debt. Textron might also have to spin off its golf carts and fuel systems unit, which in the long run will help the company as it will realign its focus on the aerospace and defense industries. [5]

At the end of the day a spin-off might still be a better option than a sale for UTC due to the huge tax bill it will incur due to the potential sale. Read our analysis about the potential benefits of UTC spinning-off Sikorsky here.

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Notes:
  1. United Technologies Sikorsky – Investor and Analyst Meeting, March 12, 2015, United Technologies [] []
  2. UTC’s Sikorsky Spinoff: Good For UTC, Good For Sikorsky…Two Out Of Three Ain’t Bad, March 14, 2015, Forbes []
  3. Lockheed Martin Open to Acquisitions, But Won’t Comment on Sikorsky, Wall Street Journal []
  4. AH-64 Apache Longbow, Aeroweb []
  5. Textron Is Best Option for Sikorsky Sale Over Spinoff, Bloomberg Business [] []
  6. Marillyn Hewson seeks to diversify Lockheed, Politico []
  7. Lockheed Martin Open to Acquisitions, But Won’t Comment on Sikorsky, Wall Street Journal []
  8. Textron Reports First Quarter 2015 Income from Continuing Operations of $0.46 per Share, up 48.4%; Revenues up 7.9%, Textron []