United Technologies Pares Its Portfolio With Pratt & Whitney Power Systems Sale

United Technologies (NYSE:UTX) has agreed to sell the industrial gas turbine business of Pratt & Whitney to Mitsubishi Heavy Industries. ^[1] The sale is part of United Technologies’ (UTC) ongoing portfolio transformation with the aim to focus on its aerospace and commercial businesses. The deal, which is currently pending regulatory approval, is expected to close in the second quarter of 2013. The terms of the deal were however not disclosed.

As part of this strategic portfolio transformation, UTC has undertaken multiple acquisitions and divestitures this year including the acquisition of Goodrich Corporation, increase in Pratt & Whitney’s stake in International Aero Engines (IAE) and a number of additional small acquisitions in the aerospace industry.

We currently have a stock price estimate of $85.89 for the company, approximately 5% above its current market price.

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Sale of Pratt & Whitney Power Systems business to Mitsubishi Heavy Industries

The Pratt & Whitney division of United Technologies (UTC) designs, manufactures and services aircraft engines, space propulsion systems and industrial gas turbines. Under the deal, it will sell its industrial gas turbine business unit to Mitsubishi Heavy Industries. This unit, called Power Systems, has more than 2,000 industrial gas turbines installed for power generation purposes in over 50 countries. ^[2] Mitsubishi is buying the unit as Power Systems’ small and medium-sized gas turbines complement its own portfolio, which is composed primarily of large-sized turbines.

Ongoing portfolio transformation to increase focus on the commercial aerospace industry

This deal allows UTC to increase its focus on the commercial aerospace industry which is poised for long-term growth. Boeing projects a $4.5 trillion global market for 34,000 airplanes over the next 20 years, and UTC through acquisitions has positioned itself firmly to take a significant share of this market. ((Boeing market outlook for 2012-2031, December 13 2012, www.beoing.com))

In June 2012, Pratt & Whitney increased its stake in International Aero Engines (IAE) through the acquisition of Rolls Royce’s interest in the same. IAE manufactures the V2500 engine which powers the Airbus A320 family of aircraft. Thereafter, in July 2012, UTC acquired Goodrich Corp., a major supplier of aerospace components like landing gears, actuation and electronic systems, interiors and aircraft nacelles.

Additionally, this portfolio transformation with an increasing focus on the commercial aerospace industry is not over yet. UTC needs to sell certain units of the acquired Goodrich Corp. as per the terms of regulatory clearance it received for the Goodrich deal. Recently, its attempt to sell the pumps and engine controls business of Goodrich to TransDigm Group was scuttled by the U.S. Department of Justice. UTC is currently searching for another buyer.

All in all, UTC’s increasing focus on the commercial aerospace industry will help drive long-term growth in its earnings.

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1. United Technologies to sell Pratt & Whitney Power Systems unit to Mitsubishi Heavy Industries, December 12 2012, www.utc.com [↩]
2. Pratt & Whitney power systems unit, December 12 2012, www.pw.utc.com [↩]