UTX United Technologies Corporation

By Austen Hufford and Ted Mann 

Honeywell International Inc. and United Technologies Corp. duked it out on Friday, attempting to rally shareholder support as their discussions over a potential $90.7 billion merger spilled into the open.

Honeywell unveiled the details of its proposal, making the case for merging two of America's largest industrial companies and seeking to ratchet up pressure to negotiate a deal. United Technologies responded hours later with its own public filing rejecting the deal and reiterating its concerns about any combination being able to survive regulatory scrutiny.

The competing arguments suggest Honeywell will continue to push hard for a deal; the ultimate outcome of the takeover battle may be decided by how well each company makes its argument to investors.

Honeywell said its offer, which it first made privately last week, valued United Technologies at about $108 a share, including $42.63 in cash and 0.614 of a Honeywell share. The Wall Street Journal had reported terms of the offer earlier this week, citing a person familiar with the matter.

But its 10-page presentation doesn't address how Honeywell would surmount what United Technologies says is the primary obstacle--the likely objections of antitrust regulators to the combination of two major aerospace equipment suppliers.

In a letter released to investors Friday, United Technologies CEO Gregory Hayes repeatedly pointed to regulatory risk, saying the merger wouldn't get approved due to an environment that "is the most aggressive toward megadeals in decades." Even if a deal were approved, he argued that the required delays and divestitures would far outweigh any benefits and potential synergies.

The company was dismissive, too, of the deal's structure, which would use some cash from United Technologies' balance sheet to fund the transaction. "Effectively Honeywell's proposal is a leveraged buyout of UTC using UTC's own strong balance sheet," Mr. Hayes wrote.

Honeywell believes that any objection from regulators in the U.S. or Europe could be dealt with through relatively simple divestitures. Aerospace businesses where the two companies currently overlap, like production of electrical power units for aircraft, could be sold off to satisfy government concerns about creating a monopoly.

One major investor in both companies said the merger wouldn't be as difficult to complete as United Technologies and Mr. Hayes suggest.

"It seems to me there could be a path to approval," said Tobias Welo, portfolio manager for Fidelity Management & Research Co., which is the eighth-largest shareholder at United Technologies and 11th-largest at Honeywell.

"In industrials, there's a path forward if you're willing to divest the assets," Mr. Welo said. "You just have to make sure the deal still makes economic sense."

This week, Honeywell CEO David Cote has been on the road, including visiting with investors in Boston to make his case on the merits of the deal. Mr. Welo said Honeywell is taking a similar tack to other industrial companies that have used a year of slumping valuations as an opportunity to snap up competitors at low prices.

United Technologies has pushed the opposite case, focusing especially on the mammoth customers most likely to oppose a merger of key aerospace suppliers: Airbus Group SE and Boeing Co. On Wednesday, both plane-makers expressed reservations about the potential merger.

United Technologies said the two companies are head-to-head competitors in many aerospace and building systems business lines, pointing to small and medium aircraft engines, wheels and lighting, among others.

On Friday, United Technologies warned that U.S. and European regulators aren't the only ones who would have to bless the merger. China in particular could prove a challenge, since the country might require that some aerospace assets be sold to a Chinese buyer. Such a sale could trigger its own national security review in the U.S., the company suggested.

In its presentation, Honeywell said the combined company will have "highly complementary" offerings that also have limited overlap. According to Honeywell, potential regulatory issues would be "easily resolved."

Honeywell argues that a combined company would retain an investment-grade credit rating, another nod to possible shareholder concerns. And it makes clear that what was discussed months ago as a merger of equals is now a takeover. Honeywell's Mr. Cote would run the new company as both chairman and chief executive.

Shares of Honeywell fell 1.1% to $103.03, while United Technologies slipped 38 cents to $97.69.

Write to Ted Mann at ted.mann@wsj.com and Austen Hufford at austen.hufford@wsj.com

(END) Dow Jones Newswires

February 26, 2016 17:49 ET (22:49 GMT)

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