UTX United Technologies Corporation

By Cara Lombardo 

United Technologies Corp. is near a deal to combine with military contractor Raytheon Co., according to people familiar with the matter, the latest move by the sprawling conglomerate to transform into a company focused on aerospace and defense.

The companies, which together have a market value of roughly $166 billion, could announce a deal in the coming days assuming talks don't fall apart at the last minute, the person said.

Exact terms couldn't be learned but United Technologies shareholders are likely to own a majority of the combined company.

The tie-up, expected to be billed as a merger-of-equals, wouldn't affect United Technologies' existing plans to spin off its Otis elevator and Carrier building-systems businesses into separate companies. Raytheon would be combining with United's remaining aerospace business, and all transactions would take place at the same time. United Technologies has said the spinoffs will take place in the first half of next year.

Adjusting for the spinoffs, the companies' combined market value would likely still be north of $100 billion. The new entity would be the world's second-largest aerospace-and-defense company by sales after Boeing Co., with annual revenue of more than $70 billion last year.

In addition to other benefits from increased scale, the proposed deal could help the enlarged company weather any slowdown in the commercial aerospace and defense markets.

United Technologies Chairman and Chief Executive Greg Hayes is expected to lead the combined company, while Raytheon Chairman and CEO Thomas Kennedy would be chairman, the person said.

United Technologies has a market value of roughly $114 billion, while Raytheon's is about $52 billion.

The deal would be one of the largest in a year that has included some big mergers but otherwise has been lackluster. Right now the biggest proposed acquisition is Bristol-Myers Squibb Co.'s $74 billion purchase of rival drugmaker Celgene Corp.

A United Technologies-Raytheon combination has long been speculated on by analysts and investors, given that the two companies operate in mainly different segments and could benefit from sharing technology.

It would unite the maker of Pratt & Whitney engines -- used on commercial airliners such as the Airbus SE A320neo -- and the F-35 combat jet, with Raytheon, the fourth-largest U.S. defense contractor by revenue.

Farmington, Conn.-based United Technologies, which acquired Rockwell Collins for $23 billion late last year, is one of America's last remaining big industrial conglomerates -- though it is set to radically transform with the spinoffs and now the merger.

The Otis elevator division and Carrier building-systems businesses will become separate publicly traded companies, leaving United Technologies as a pure-play aerospace company. The rationale for the split was clear in the company's first-quarter results as the aerospace portions of its business posted strong growth.

Investors are pressuring traditional conglomerates to become more focused. Rivals Honeywell International Inc. and General Electric Co. are both shaving off units to streamline their businesses.

Several activist investors had pushed United Technologies to split, and Mr. Hayes has openly expressed his preference for smaller, more focused companies. Before the Rockwell deal, the company's revenue was about evenly split between airplanes and buildings.

Waltham, Mass.-based Raytheon, whose sales rose 6.7% last year to $27.1 billion, produces missiles such as the Tomahawk together with radars and other electronic-warfare systems. It has invested heavily in recent years ahead of the recent uptick in Pentagon spending, and has the biggest export business among the five largest U.S. defense contractors.

While commercial aircraft sales have been booming during an unprecedented 13-year surge in orders that has left Airbus and Boeing with backlogs of more than 13,000 jetliners, analysts have cautioned that slowing air traffic could force aircraft makers to reverse production increases.

The two-year uptick in Pentagon spending on new aircraft, missiles and other defense equipment is also running out of steam, with analysts projecting muted growth over the next several years.

The U.S. defense industry has morphed from about 60 big companies at the start of the 1980s to only five prime contractors today. Pentagon leaders have indicated they wouldn't allow further mergers between the main players -- Lockheed Martin Corp., Boeing, Northrop Grumman Corp., General Dynamics and Raytheon.

However, combining United Technologies' aerospace assets with Raytheon is likely to attract less scrutiny given that the companies have almost no overlap in their defense businesses.

Thomas Gryta and Doug Cameron contributed to this article.

Write to Cara Lombardo at cara.lombardo@wsj.com

(END) Dow Jones Newswires

June 09, 2019 10:07 ET (14:07 GMT)

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