NEW YORK (The Deal) -- A combination of tax, regulatory and even labor issues figure to complicate any potential bid for United Technologies' (UTX) Sikorsky unit, meaning a spinoff remains the more likely option for the helicopter manufacturer.
Hartford, Conn.-based United Technologies said in March it was exploring options for Sikorsky as part of a broader push to revamp its portfolio. From the start, an outright sale appeared unlikely because of the enormous tax bill that would accompany a sale of Sikorsky, which has been part of United Technologies since the 1920s.
Reports surfaced late Tuesday that a number of suitors including Boeing (BA), Airbus, Textron (TXT) and Lockheed Martin (LMT) were exploring bids for Sikorsky. The suitors could seek to get around the tax issues by participating in a spinout via a Reverse Morris Trust, where Sikorsky could be shed tax-free if UTX holders ended up with a majority stake in the new entity.
United Technologies would have to determine that such a deal provides enough extra value vs. a straight split to justify the added complexity and regulatory scrutiny, not to mention the added time needed to deal with those issues. UTX has said it hopes to complete its evaluation by midyear.
All the potential suitors are too large to merge with Sikorsky -- which is valued at about $8 billion -- and keep UTX holders with majority control, though Textron is small enough that it could orchestrate a separate spinoff of some of its industrial and transportation assets and then combine its aerospace business with the helicopter maker.
Providence, R.I.-based Textron, a maker of business jets, Bell helicopters, golf carts and auto parts, has long been seen as a potential candidate for a split, but it is unclear whether the company could unwind itself quickly enough to make a play for Sikorsky.
The other potential suitors seem more likely to get involved by either investing cash or combining select assets with Sikorsky following a spinoff. But while there is ample reason for them to be interested in the combination, there is equal reason to worry the Department of Defense would object to many of the combinations.
Sikorsky, which ranks as the largest helicopter supplier to the U.S. military, could find it difficult to win approval for a deal to combine with either Boeing, the second largest, or Airbus, the world's largest helicopter producer.
Lockheed Martin is a vendor to Sikorsky and other helicopter suppliers. Cowen & Co. analyst Cai von Rumohr notes that role could both raise vertical integration concerns, and rules that prevent U.S. contractors from adding margin to in-house supply deals would limit the profitability of a potential deal.
Von Rumohr also noted that Boeing could be reluctant to pay up for Sikorsky given the two companies' overlapping unions, which would make cost synergies more difficult to achieve.
But a defense banker reached Wednesday morning noted that the reason UTX is keen to shed Sikorsky is the lack of growth in the helicopter market.
The banker, who has consulted with one of the auction participants, said that the spinoff of Sikorsky remains the most likely next step, but said that if UTX can find a partner for the business it would help put to rest investor worries about Sikorsky and lead to a higher valuation for the company after a split.