Summary
- United Technologies is spinning off its Carrier and Otis divisions with the remaining aerospace business set to merge with Raytheon.
- The merger exchange ratio of UTX shares per RTN share allows an implied value of Carrier and Otis to be calculated.
- Based on 2019 projected segment income, Carrier and Otis appear undervalued up to 44% relative to pure-play HVAC and elevator competitors.
- The Carrier and Otis value can be captured with a long UTX / short RTN trade, but it is subject to the risk of the merger not being completed.
Introduction
With the announcement of the merger between United Technologies (UTX) and Raytheon (RTN), we now have a basis for calculating the implied market value of Carrier and Otis, the two commercial businesses that will be spun off from UTX just prior to the merger. Based on a conservative 2019 earnings forecast for Carrier and Otis, this implied market value appears low by as much as 44% compared to comparable HVAC and elevator manufacturing companies.
United Technologies previously announced its intent to spin off its two commercial businesses, HVAC company Carrier and elevator-maker Otis. Subsequently on 6/9/2019, UTX announced its agreement to merge the remaining aerospace divisions, Pratt & Whitney and Collins Aerospace Systems, with Raytheon in an all-stock transaction. Raytheon shareholders will get 2.3348 UTX shares for each current RTN share. The combined aerospace and defense company will be known as Raytheon Technologies (RTX). Carrier and Otis will each begin trading as separate shares at that time, somewhere in the first half of 2020.
Much has been written here about the prospects for the combined Raytheon Technologies and I will not add much analysis on that in this article. I will instead compare the implied value of Carrier and Otis to their closest competitors to make the case for a merger arbitrage play. You could simply buy UTX if you want exposure to the new aerospace company as well as Carrier and Otis. Alternatively, you could buy 2.3348 shares of UTX and short 1 share of RTN such that you end up with only Carrier and Otis shares after all the deals are done. Of course, there are risks involved, including the merger not closing as planned. With a 44% return opportunity on the spinoff companies, you are compensated for these risks.
