On Wednesday the company announced that it is reviewing strategic alternatives for is Sikorsky helicopter division, including a possible tax-free spin-off of the business. Sikorsky generates annual sales of about $7.5 billion, two-thirds of which comes from defense. It is, however, the smallest of UTC’s five major business units and represents about 11.5% of the conglomerate’s $65 billion in annual revenues.
The big problem with any kind of separation is taxes. UTC has owned Sikorsky since 1929, and the tax basis for the division is very low and the appreciation is going to be very high. Add to that shrinking defense budgets and a note from Moody’s Investor’s Service on Thursday that a “potential spin-off of the Sikorsky helicopter business is yet another in a series of recent credit negative developments.” Ouch.
However, UTC has to do something. The company’s stock price, currently around $122, is considerably less than a sum-of-the-parts valuation of $161 a share reportedly calculated by Sterne Agee analyst Peter Arment last month.
The sudden retirement of former CEO Louis Chenevert last November may have cleared the way for a divestment of Sikorsky, a move Chenevert said he would not consider. New CEO Gregory Hayes has no such qualms.
Shedding Sikorsky, which Arment calculated was worth $8 to $10 a share at a market cap of around $7.0 billion to $8.5 billion, will not have much impact on UTC and its $110 billion valuation. The move would be more symbolic than anything else.
As for the buyback, the total number of shares UTC is repurchasing represents about 1% of those outstanding. That is not enough to move the share price needle much.
Shortly after Friday’s opening bell, UTC traded up fractionally at $121.40, in a 52-week range of $97.30 to $124.45.
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