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UPDATE 2-United Technologies to merge aerospace business with Raytheon

Harry Brumpton and Kate Duguid

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June 9 (Reuters) - United Technologies Corp agreed on Sunday to combine its aerospace business with U.S. defense contractor Raytheon Co and create a new company worth more than $120 billion, in what would be the industry's biggest ever merger.

The deal would reshape the competitive landscape by forming a conglomerate which spans commercial aviation and defense equipment. United Technologies provides primarily commercial plane makers with electronics, communications and other equipment, whereas Raytheon mainly supplies the U.S. government with military aircraft and missile equipment.

Raytheon shareholders will receive 2.3348 shares in the combined company for each Raytheon share, the companies said in a statement. The merger is expected to result in more than $1 billion in cost synergies by the end of the fourth year.

United Technologies shareholders will own about 57% of the combined business, called Raytheon Technologies Corporation, which will be led by Greg Hayes, the current chief executive of United Technologies. Raytheon shareholders will own the remaining stake, and Raytheon CEO Tom Kennedy will be named executive chairman.

United Technologies and Raytheon have market capitalizations of $114 billion and $52 billion, respectively.

The deal is expected to close in the first half of 2020, following the previously announced spin-off of United Technologies' Carrier air conditioning and Otis elevator businesses.

The newly created company is expected to return between $18 billion and $20 billion of capital to shareholders in the first three years after the deal's completion, the companies said. The new company will also assume about $26 billion in net debt, they added.

Raytheon, maker of the Tomahawk and the Patriot missile systems, and other U.S. military contractors are expected to benefit from strong global demand for fighter jets and munitions as well as higher U.S. defense spending in fiscal 2020, a lot of it driven by U.S. President Donald Trump's administration.

However, Pentagon spending is projected to slow down after an initial boost under Trump. A deal with United Technologies would allow Raytheon to expand into commercial aviation, which does not rely on government spending like the defense sector.

United Technologies could benefit from reducing its exposure to commercial aerospace clients amid concerns that the rise of international trade protectionism will weigh on the flow of goods through air traffic.

The International Air Transport Association, which represents about 290 carriers accounting for more than 80% of global air traffic, cited these concerns earlier this month, when it said the industry is expected to post a $28 billion profit in 2019, down from a December forecast of $35.5 billion. (Reporting by Harry Brumpton and Kate Duguid in New York Additional reporting by Rama Venkat in Bengaluru Editing by Bill Trott and Richard Chang)