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Raytheon and United Technologies Aerospace Businesses to Combine in Merger of Equals

Ingrid Hendershot, President of Hendershot Investments, an investment management company, www.hendershotinvestments.com reports on the proposed merger between Raytheon and United Technologies Corp.

Raytheon Company (NYSE: RTN) and United Technologies Corp. (NYSE: UTX) have entered into an agreement to combine in an all-stock merger of equals. The transaction will create a premier systems provider with advanced technologies to address rapidly growing segments within aerospace and defense. The merger of Raytheon, a leading defense company, and United Technologies, a leading aerospace company, comprised of Collins Aerospace and Pratt & Whitney, will offer a complementary portfolio of platform-agnostic aerospace and defense technologies. The combined company, which will be named Raytheon Technologies Corporation, will offer expanded technology and R&D capabilities to deliver innovative and cost-effective solutions aligned with customer priorities and the national defense strategies of the U.S. and its allies and friends. The combination excludes Otis and Carrier, which are expected to be separated from United Technologies in the first half of 2020 as previously announced.

The combined company will have approximately $74 billion in pro forma 2019 sales including $21 billion from Pratt & Whitney and $22 billion from Collins Aerospace on the United Technologies side and $18 billion from Intelligence, Space and Airborne Systems and $16 billion from Integrated Defense and Missile Systems on the Raytheon side. Pro forma sales by geography include 55% in the United States and 45% in international markets. The deal is also balanced on sales by end markets with 54% of sales generated by defense markets and 46% by commercial markets. With a strong balance sheet and robust cash generation, Raytheon Technologies will enjoy enhanced resources and financial flexibility to support significant R&D and capital investment through business cycles.

Under the terms of the agreement, which was unanimously approved by the Boards of Directors of both companies, Raytheon shareowners will receive 2.3348 shares in the combined company for each Raytheon share. Upon completion of the merger, United Technologies shareowners will own approximately 57 percent and Raytheon shareowners will own approximately 43 percent of the combined company on a fully diluted basis. The merger is expected to close in the first half of 2020, following completion by United Technologies of the previously announced separation of its Otis and Carrier businesses.

With a combined annual company and customer funded R&D spend of approximately $8 billion, seven technology Centers of Excellence, and over 60,000 engineers, the company will develop new, critical technologies faster and more efficiently than ever before. Areas of joint advancement include, but are not limited to: hypersonics and future missile systems; directed energy weapons; intelligence, surveillance, and reconnaissance (ISR) in contested environments; cyber protection for connected aircraft; next generation connected airspace; and advanced analytics and artificial intelligence for commercial aviation. Robust free cash flow growth and a strong balance sheet will support continued investment and return of capital to shareowners. The combined companies expect to generate double-digit free cash flow growth with expectations of approximately $8 billion in pro forma free cash flow by 2021. The free cash flow growth will be generated by organic growth working capital efficiencies, capital expenditure investment cycle moderation and cost synergies.

The combined company expects to return $18 to $20 billion of capital to shareowners in the first 36 months following completion of the merger. As a result of the combination, the company also expects to capture more than $1 billion in gross annual run-rate cost synergies by year four post-close, with approximately $500 million in annual savings returned to customers. In addition, the combination presents significant long-term revenue opportunities from technology synergies. Net debt for the combined company at the time of closing is expected to be approximately $26 billion, with United Technologies expected to contribute approximately $24 billion.

The combined company targets an 'A' category credit rating at the time of the closing. The combined company's Board of Directors will be comprised of 15 members, consisting of 8 directors from United Technologies and 7 from Raytheon, with the lead director from Raytheon. Tom Kennedy will be appointed Executive Chairman and Greg Hayes will be named CEO of Raytheon Technologies. Two years following the close of the transaction, Hayes will assume the role of Chairman and CEO.

There is no change to either Raytheon's or United Technologies' financial outlook for 2019.

Editor’s Note: United Technologies Corp.’s $120 billion aerospace merger with Raytheon is facing stiff resistance from hedge fund moguls. President Donald Trump recently told CNBC that he was a “little concerned” the proposed deal could harm competition and make it more difficult for the U.S. government to negotiate defense contracts. Read More

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