UTC Weighs Sikorsky's Future
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Of the options, sources said, divestiture or a tax-free spinoff are more likely than growth through acquisitions or mergers.
It remains unclear how quickly it could be sold or spun off as an independent entity, nor who might be a potential buyer, although Sikorsky could emerge as a tempting target for European firms eager to crack a US market that despite defense cuts remains lucrative.
Both Sikorsky and UTC, which also owns aircraft engine maker Pratt & Whitney and UTC Aerospace Systems, declined comment.
“We don’t comment on market rumor or speculation,” UTC spokesman John Moran said.
Brett Lambert, the Pentagon’s former manufacturing and industrial policy chief, said the market is ripe for merger and acquisition activity in the defense sector.
“Now that there’s some stability and visibility in the future years defense budgets, plans that had been developed in closed board rooms over the last two years of a volatile market are going to become public,” Lambert said. “I expect we will see more activity, whether mergers, acquisitions or spinoffs in the next 12 months than we have seen in the last 36.”
Over the past five years, the Pentagon has awarded $18 billion for Sikorsky helicopters, parts and services, making the company the leading rotorcraft provider to the DoD. Over the same period, Congress has appropriated some $42.1 billion for helicopter programs, according to data provided by VisualDoD, a Virginia-based defense consulting firm.
The H-60 family is the US military’s workhorse rotorcraft, used for troop and cargo transport, search-and-rescue and anti-submarine missions. In 2010, about 45 percent of DoD’s helicopter budget went to H-60 and associated programs, but that share declined in fiscal 2014 to 35 percent.
Indeed, Sikorsky’s overall sales are declining. When UTC released its earnings for 2013 on Jan. 22, Sikorsky’s operating profit margin was down 1 percentage point and net sales were down 9 percent. By contrast, UTC saw total sales rise 9 percent to $62.6 billion.
UTC’s director of investor relations, Jay Malave, attributed Sikorsky’s declining sales to weak overseas demand during the company’s earnings call.
“The sales decline was driven by lower international ... military aftermarket volumes, which were [only] partially offset by higher commercial shipments,” he said.
UTC is one of a declining number of multi-industrial companies with a leading presence in defense. While there are some groups with comparatively small footprints in defense, the only other similar entity is Textron.
The defense market used to be dominated by such companies, but during the 1990s defense downturn, most multi-industrials divested their defense businesses, which reformed into the consolidated defense titans that dominate the market today.
While any effort by UTC to divest Sikorsky might be seen as an echo of those prior moves, it isn’t necessarily a harbinger of similar moves by the few remaining multi-industrials, said Byron Callan, an analyst with Capital Alpha Partners.
“It says more about the dynamics of the helicopter market,” he said. “It’s been a good business, but it has some real challenges and dynamics five years from now. Why wouldn’t you take those steps now?”
While sources said UTC has discreetly discussed a sale with potential buyers, analysts said that a tax-free spinoff could be more desirable, given the enormous potential tax liability of most outright sales.
Contractors such as ITT, L-3 Communications, Northrop Grumman and SAIC have all used spinoffs to divest units and the tax obligations that go with them. In most cases, investors viewed the divested companies as a drag on the margins of the parent company, creating the perception that greater value could be unlocked by separating them.
UTC, however, isn’t in the same position, Callan said.
“I don’t think shareholders have looked at Sikorsky as an albatross,” he said.
While Sikorsky is the Pentagon’s leading helicopter supplier, Boeing is No. 2, with $11.7 billion dedicated to Chinook cargo and Apache attack helicopter programs over the past five years.
The Bell-Boeing joint venture that builds the V-22 Osprey tilt-rotor aircraft is No. 3 with $11.6 billion over the same period, according to VisualDoD. Bell Helicopter, a division of conglomerate Textron, is fourth and Airbus Helicopters (formerly Eurocopter), is fifth.
Sikorsky has worked closely with defense giant Lockheed Martin on the Seahawk naval variant of the Black Hawk, and the two have also teamed for the upcoming US Navy competition to build a new Marine One helicopter and a new US Air Force combat search-and-rescue helicopter, a 112-aircraft deal that is pending.
The Air Force has already said it would award the companies the contract for the machines if money is available in the Pentagon’s 2015 budget, which is expected to head to Congress March 4.
Sikorsky and Lockheed previously paired to compete for a separate Air Force support helicopter contract that was canceled due to US defense spending cuts.
Sikorsky has invested millions of dollars of its own funds in developing the X-2, a compound helicopter that uses stacked rotors, which drastically increases the aircraft’s speed and hover ability. The company plans to use the technology on the S-97 Raider, which it plans to bid in the US Army’s Armed Aerial Scout program.
The Connecticut-based company, with roots dating to the early 1900s, had partnered with Boeing in the 1990s to build the Comanche, a stealthy reconnaissance and attack helicopter. The program was canceled in 2004 after nearly $7 billion had been spent on development.
A stealthy, modified Black Hawk flew Navy SEALs deep into Pakistan for the 2011 mission that killed al-Qaida leader Osama bin Laden.
But the future of the military helicopter market is murky. The Army’s Armed Aerial Scout program, an effort to replace the Bell Kiowa Warrior, is on hold, and the Army’s new vertical-lift initiative is not scheduled to produce helicopters until the 2020s.
Vago Muradian contributed to this report. [via]
