UTX United Technologies Corporation

By Ted Mann 

Honeywell International Inc. kept the pressure on rival United Technologies Corp. to engage in merger talks, saying there were no major regulatory obstacles to a combination of the two industrial conglomerates.

"We do not see the regulatory process as a material obstacle to a transaction," Honeywell said Tuesday. It said the proposed combination would create $3.5 billion in savings and benefit customers, but offered a reassurance to its own shareholders that it wouldn't overpay to get its rival to the negotiating table.

"We would not and will not pursue a transaction that is not in the best interest of our shareowners," Honeywell said.

Honeywell's persistence comes amid sharply divergent visions of whether regulators would allow two major players in the increasingly consolidated aerospace industry to join together. In some cases, such a merger would leave just one supplier for crucial aircraft parts and systems.

United Technologies said the Honeywell proposal was dead on arrival because of the likely objections of major customers--such as plane makers Boeing Co. and Airbus Group SE--as well as regulators on three continents. Each also is a major supplier to the U.S. military.

"It ain't going to happen," Chief Executive Gregory Hayes said Tuesday in an appearance on CNBC. "There is just no way to get it done."

The industrial giants, which have a combined $95 billion in annual revenue, share an extended list of overlapping aerospace products that range from environmental-control systems for planes to engines that power business jets and military helicopters.

Every electric-power generating turbine, known as the auxiliary power unit, that is supplied to Boeing and Airbus jetliners, and other major plane-makers comes from either Honeywell or United Technologies. That business would likely be the first to be divested by one of the companies if any merger were to come to fruition, according to a person familiar with Honeywell's analysis of the two portfolios.

Following a decade of consolidation among aerospace companies, so-called Tier 1 suppliers such as Honeywell and United Technologies have sought to increase leverage with their aircraft-making customers by demonstrating their breadth of products and technical expertise integrating complex systems.

Boeing and Airbus account for about $10 billion worth of annual revenue at United Technologies. Airbus alone represents about 40% of sales at the company's Pratt & Whitney jet engine business.

In recent years, the big aircraft makers have sought to regain control and leverage by shifting some work to smaller suppliers, said Kevin Michaels, vice president with ICF International's aerospace-consulting practice. For example, Boeing on its coming 777X jetliner selected a small Canadian firm to provide the landing gear, unseating United Technologies, a move seen by industry officials as part of Boeing's effort to renegotiate its contracts with the industrial giant.

"Honeywell and UTC were right in the bull's-eye" for Boeing's cost-cutting initiative, and with a potential merger "you've created another concentric ring inside the bull's-eye," said Mr. Michaels.

When United Technologies recently disclosed the merger proposal to top-ranking executives at some of its biggest customers, the reaction was "a violent 'No,' " one person familiar with the company's thinking said.

But people familiar with Honeywell's thinking reject the argument that antitrust approval would be as difficult to obtain as Mr. Hayes suggests. Honeywell estimates the companies would have to review business lines worth about $4 billion on antitrust grounds, and that ultimately it would have to divest businesses worth less than 4% of United Technologies' annual sales, or about $2 billion in sales.

A combined company would likely jettison businesses including small turboshaft and propulsion engines, air-turbine starters and units related to human spaceflight, among others, all of which Honeywell believes could quickly find buyers. "This is not rocket science," one of these people said.

United Technologies estimates the divestitures would total $9 billion to $10 billion, according to another person familiar with the company's thinking, and would require disruptive efforts to shed some product lines while retaining others.

After months of on-and-off discussions, on Friday Honeywell CEO David Cote met in person with Mr. Hayes and United Technologies' board chairman, Edward Kangas, and presented slides laying out his plan to combine the two companies, according to people familiar with the matter. Honeywell was offering to pay $108 a share for United Technologies.

The deal would have made Mr. Cote, 63 years old, CEO of the new entity, while creating an important but unspecified role for Mr. Hayes, 55, one of the people said. Mr. Cote intended to remain CEO long enough to oversee a successful integration of the two companies, leaving open a possibility that Mr. Hayes would one day ascend to the top spot.

Write to Ted Mann at ted.mann@wsj.com

(END) Dow Jones Newswires

February 23, 2016 19:53 ET (00:53 GMT)

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