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United Technology in talks to merge with Raytheon: Source

New company in aerospace and defence sectors will be worth more than $136b

WASHINGTON: United Technologies is nearing a deal to merge its aerospace business with US defence contractor Raytheon and form a new company worth well over US$100 billion (S$136 billion), a person familiar with the matter said on Saturday.

United Technologies and Raytheon are seeking to pool resources in what would be the biggest merger in the aerospace and defence sectors.

United Technologies primarily provides commercial plane makers with equipment such as communications equipment, whereas Raytheon is a vendor mainly to the US government for equipment in military aircraft and missiles.

The deal would be structured as an all-stock merger of equals because United Technologies would separately spin off its Carrier air-conditioning business and Otis elevator division, as it has previously announced it would do, the source said.

If negotiations between United Technologies and Raytheon are completed successfully, a deal could be announced as early today, the source added, asking not to be identified because the matter is confidential.

United Technologies declined to comment, while Raytheon did not immediately respond to a request for comment.

United Technologies has a market capitalisation of US$114 billion, but without Carrier and Otis, its value could be less than US$60 billion, bringing it closer to Raytheon's market capitalisation of US$52 billion.

The Wall Street Journal first reported on the potential deal, stating that United Technologies chief executive Greg Hayes is expected to lead the newly created company, while Raytheon CEO Thomas Kennedy would be chairman.

Raytheon, maker of the Tomahawk and Patriot missile systems, and other US military contractors are expected to benefit from strong global demand for fighter jets and munitions as well as higher US defence spending in fiscal 2020, a lot of it driven by US President Donald Trump's administration.

However, Pentagon spending is projected to slow down after an initial boost under Mr Trump.

A deal with United Technologies would allow Raytheon to expand into commercial aviation, which does not rely on government spending like the defence sector.

Conversely, United Technologies could benefit from reducing its exposure to commercial aerospace clients amid concerns over the rise of protectionism in international trade.

The International Air Transport Association, which represents about 290 carriers accounting for more than 80 per cent of global air traffic, cited these concerns earlier this month, when it said the industry is expected to post a US$28 billion profit in 2019, down from a December forecast of US$35.5 billion.

United Technologies has said it is on track to separate Carrier and Otis in the first half of 2020, leaving the company focused on its aerospace business through its US$23 billion acquisition of Rockwell Collins, which was completed in 2018, and the Pratt & Whitney engines business. - REUTERS

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