Shares of United Technologies 'dead money' after 'hefty' deal price for Rockwell Collins, Cowen says

  • Cowen research downgraded United Technologies after it embarked on the largest deal in aerospace industry history.
  • United Technologies announced its plans to buy aircraft parts maker Rockwell Collins for $23 billion on Monday.
  • Following the announcement of the deal, shares of United Technologies dropped nearly 6 percent Tuesday.
United Technologies Chairman and CEO Greg Hayes.
Brendan McDermid | Reuters
United Technologies Chairman and CEO Greg Hayes.

Cowen research downgraded United Technologies to market perform from outperform on Wednesday, citing the jet-engine maker's "hefty" deal price for Rockwell Collins and increased debt load following the proposed deal.

Tuesday's "6 percent selloff may have been an overreaction; but the stock looks like 'dead money' at least until the COL deal is completed," wrote Cowen analyst Cai von Rumohr.

United Technologies announced plans on Monday to buy aircraft parts maker Rockwell Collins for $23 billion, combining the two firms' aerospace segments to create a new business unit called Collins Aerospace Systems. United Technologies will pay $140 a share in cash and stock, an 18 percent premium to Rockwell's closing price last week before news of the deal broke.

"[The] proposed acquisition of Rockwell Collins is a great strategic fit. It gives United Technologies complementary products, especially avionics and IMS, to maximize potential for digital applications," von Rumohr wrote. However, the deal price, including debt, implies a 15.4 multiple on Rockwell's pro-forma EBITDA for 2017, he added.

Following the announcement of the acquisition, the biggest deal in the history of the aerospace industry, shares of United Technologies dropped nearly 6 percent Tuesday. Boeing, one of the companies' main customers, expressed doubts over the agreement, saying it was "skeptical" the transaction would benefit airline customers.

Rockwell Collins' shares rose Tuesday, but still were far short of the deal price as investors remain skeptical deal will pass government scrutiny.

The analyst lowered his United Technologies price target to $120 from $127, representing 8 percent upside from Tuesday's close.