United Technologies-Rockwell Collins Deal Defends Against Boeing, Rothacker Says

Technologies may be considering an acquisition of Rockwell Collins. And here to tell us more about this potential deal is Bloomberg Intelligence. Is Joel Levington. He is an expert in the world of corporate debt. And Douglas Rothacker, he is our aerospace and autos analyst for Bloomberg Intelligence. Gentlemen, thank you very much for being here in the studio in our eleven three oh headquarters. You know, Doug, I want to begin with you because can you tell people why

forget let's put the price aside. That's gonna be Joel's problem. He's gonna figure out how to pay for it. Uh, why would um U t X why would United Technologies want to buy Rockwell Collins. Sure, yeah, morning, thanks for having us. The strategic rational behind creating a forty billion dollar revenue airspace portfolio is largely to defend against the concerted efforts of Boeing, I would say for aftermarket services and revenue that they're trying to get into pretty aggressively

and twofold to largely gain pricing power and scale. Right, So as Boeing and Airbus work through years of development and aircraft wore largely focused on profitability, right now, you know, focus on improving margins and a lot of that is

going to trickle down to supply train pricing pressure. So as you see United Technologies, you know in this part ential deal deal, clearly it's an effort to you know, fight against that troll comment on this because it's one thing to have a great theory about, you know, uh, air aircraft control systems, you've got pilot systems, avionics, all this thing that's Rockwell Collins. Uh. Is there a price

at which this deal just looks bad? Because I mean we've been down this road before, right, I mean we we've seen in that you know, Rockwell Collins has been kind of talked about as an acquisition target previously. That's true, and given where the market is with high evaluations, uh, what I can tell you is that the math works with about a premium, which is pretty traditional for an industrial asset. So you can make the math work relative to uh EPs growth, which I think Doug get pittened

out at about seven percent. And then from a balance sheet perspective, you could lever the company up to a little over three times on a net debt basis, which is actually better than when knew we'll try to buy you U t X a little over a year ago UM and perhaps retained the single A rating that the company wants to maintain. Well, having said that, I mean, would it be any problem for them to raise the money?

I don't think. So we got a thing today, one and a half billion dollar bond offering from Tesla, So I guess you know everybody can borrow money, right, and that's coming with like a five percent coupon handle on it. So it's so maybe you and I should and Duck can open up a business together and and and finance

it with some debt. But I do think kind of the interesting or maybe the more interesting way of doing things would be if this would lead to a separate split of United Technologies, which has also been discussed, where you would have an aerospace business and an industrial business.

To me, that kind of makes the most logic and sense given what their peers have done, whether you look at a GE or dana Her and Emerson, where it seems to be all the rage these days to be a company that's single focused as opposed to a diversified industrial with some pluses and binuses. Just come in a little bit more about margins and pricing and if you can maybe use an example for Rockwall cons because this

idea of an aftermarket uh, we all know that. You know, when you buy an automobile, for example, the true cost is not what you pay. The true cost is what you pay for the life of the automobile, right right, So if you look at Rockwell Collins and their recent acquis just in b airspace there, you know, typical operating margins are north of which is well above what the United Technologies generates on their airspace portfolio. And a lot of that comes from a very large business of aftermarket

products and services. Right. So when you go and buy used aircraft, you completely tear out the insides, the guts of it, refit it with UH new seats, new interiors, and boom, your customers think they're sitting in a brand new airplane. Right. So again, oh that's high margin and would uh you know, I ran the numbers UH over

the weekend. If you combine on a proformer basis Rockwell Collins UH to United Technologies aerospace portfolio, they look at, you know, a marchin boost of hundred two hundred basis points and that's just on the you know, excluding any synergies or anything like that that that are potentially there.

But I want to bring in starboard value for just a second here, because they were a focus last year I believe when it had when you just mentioned that be a UH aerospace right the the act with the Biero Space acquisition that closed in April, Joel, I mean they were pushing, they were saying, no, don't buy anything. We we we want you to split, as you were just saying in a new strategy, right and selling out at a premium might be the elegant way out for

Rockwell Collins and their management team. So clearly you could see that, and I think if you look at what's happened with activists in the multi industrial space. Again, there has been a huge push you could look at that they wanted to get simpler. They wanted to get simpler. They want to get multiples that are focused on the different sectors and they want different balance sheets to reflect that.

So in the piece of United Technologies, what you have putting the aerospace business aside, is this industrial business with carrier, their security operations, UM and all the h VAC equipment that could be levered let's say it about three and a half times UH to mimic other peers, and with that you can take a twenty billion dollar diven end that goes a long way to paying for Rockwell Collins. Yeah. Well, I mean it sounds good on the fine on the

balance sheet, right, I mean, it looks good financially. I'm wondering, Doug, is there a technical or even uh sort of product reason to keep it all together? Because one part of the business helps to inform the other part and it goes back and forth. UM. I think for the equity shareholders to really get comfortable with this, we'd have to get back to what Joel was mentioning about separating UM

the businesses. The the EPs secretion of seven percent is is okay, it's uh, it's it's going to be a very expensive acquisition, you know, Rockwell Collins up from October when they announced quiring be Aerospace, and again Joel mentioned probably looking at so premium on top of that. Um so, I mean we'll see how the the the plans, uh you know, play out. But isn't this it's a sickly

is it a cyclical business to a certain extent? I mean, I know, you know, aftermarket's always got to replace the seeds, you know, Avionyx and somebody. Well, then the nice thing about aftermarket parts and services is that it's generally countercyclical to what you have with new production. Right, so when you're first here O E M supplier uh to Boeing and Airbus, you're you know, you're at their mercing in

terms of raising and lowering production and the cycles of that. Uh. Important offset to that is the aftermarket services business, which again is very high margin where a lot of these parts suppliers you know, uh, butter their bread as they say. All right, well, you know, Joel, last point to you. You know, if if Rockwell Collins, if this deal happens. You think you're gonna see other deals. You're always gonna see other deal I mean, well, because you know this

is like the consolidation. This is the special of the month, right, Everyone kind of gets in this fever of oh we gotta consolidate and then split right certainly in the arrows of the aerospace supply chain. I think you're you have to see consolidation happen because, as Doug was pointing out, as Boeing tries to become more vertically integrated, you have to be able to differentiate and push back on your on your client. Yeah. Well, thanks very much for being here,

both of you. I really appreciated that. Joe Levington is our senior credit analyst for Bloomberg Intelligence. And Douglas Rothacker he is an aerospace defense analyst for Bloomberg Intelligence. And just by way of a kind of shout out to Boeing, they did a fly by that actually flew around the United States in the shape of a Boeing airliner. Paul Sweeney,

he knows everything about the media and the Internet. He is our US Director of Research for Media and Internet Analysts for Bloomberg Intelligence and Paul thanks very much for coming in. I want to begin by just asking you about CBS and something with a T and T because remember when A T and T launched that direct tv now service, Well, they just reached an agreement with CBS because that will give them a lot more programming. Can we look forward to more of these kinds of deals

and what's in it for for both of them? Yeah, I think we're gonna see more of these types of deals. And Direct TV Now is a streaming direct to consumer app similar to a Netflix and UM and it's kind of a little bit of a skinny bundle, if you will. But CBS just announced that they're gonna be part of it. They're gonna be on air. It's very good for direct TV now because CBS is the number one ranked broadcasting

network in terms of total audience. So plus they have NFL football, So it's certainly a programmer and a source of programming that you want to have on your service. Uh. If you're CBS, UM, you're like a lot of these traditional media companies and you're trying to figure out, um, the business is changing, my viewer is are viewing my content on lots of different uh types of platforms. It's not just with the rabbit ears over the air like it was fifty years ago. It's not even just on

cable television. It's now on satellite and now more and more it's now direct to consumer on some of these apps. And so I think, if you're CBS, you'r ABC, your Disney, you're all any of these players. You're trying to figure out do I need to be on all these platforms? If so, what do I need to get paid to make it worth my while? What happens to CBS, Because I know that you've mentioned in the past that CBS

almost is like a standalone when it comes to programming content. Yes, CBS is a you know, it's it's the really the only standalone broadcast network, UM that investors can can play. The other broadcast networks are embedded in big media companies like Disney and Fox UM and CBS does own the Showtime premium net network as well. But if you're buying CBS, you're really buying a play on US broadcast television. UM.

It's been a great business for them. Television advertising has generally been pretty decent over the last you know, coming out of the last ten years after the financial crisis. And what's really changed for the better for CBS has been a new revenue stream for them and for the broadcast industry, and that's retransmission fees. Uh. The broadcast networks are finally getting paid by the distributors the Comcast of the world to carry their programming. They never got paid

for it before. Es Pianos got paid for their programming by the distributors, but the broadcast networks never did up until about seven or eight years ago. And CBS has really been a big beneficiary that that's been a driver of their revenue and profits. That looks to be a pretty good story going forward for CBS. So so why do you believe maybe the stock has not really performed that well this year. I mean the stock of CBS is basically unchanged. I mean that's not to say that

hasn't had big moves. I mean this was, you know, a stock trading at fifty uh, let's say back in September. Yes, the media stocks, you know, they've had a great run over the last eight nine years after the financial crisis, but really in the last year or so, it's been kind of flattish and and year to date, you know, the media stocks are pretty flat up a little bit. But the real concerns are chord cutting. That is d

number one issue out there for the media sector. If consumers really are cutting the chord in mass, everybody's economic model as is at risk. The affiliate fees that the content companies get paid, that's at risk. The advertising revenue that's built upon a large audience that can be delivered, that's at risk. And so what I think you're seeing media investors do today is try to pick some winners

and losers within the group in general. Um, but right now, I think we've had a rough third quarter results coming out of the media sector. Maybe they can turn it around tonight with CBS, who tends to be very bullish about the prospects for the sector. Will see Disney tomorrow night after the clothes, see what it has to say. Uh, investors, they are particularly concerned about ESPN and the fact that

chord cutting is having on the great ESPN. Anything on the horizon that you would point to as far as someone may be making an acquisition or a run at CBS. I mean, it's a twenty six billion dollar market cap right now. Right Well, we just had a you know, a big m and a trade in the media sector. Last week when Discovery Communications and out they are buying Scripts Networks Viacom, which is a sister company to CBS, it was rumored to be a buyer for Scripts Networks,

which really caught people by surprise. Most people didn't view Viacom as a buyer. But ultimately, when you talk about CBS, you talk about Viacom, you're talking about Subner Redstone and his common ownership of both companies. And the question remains, does do these two companies should they be uh, you know, maybe in a better position if they were to merge, and remember they used to be together than they split

apart about ten years ago. The question is now in a consolidating media world, in a world that's being disrupted by the Internet like Netflix, Um, do these companies need to be bigger, stronger, have more heft in the marketplace. If so, then the easiest transaction for both of these companies via common CBS to simply kind of merge back together. All right, now, you mentioned Disney, so let's move on to there because I want to get your thoughts on ESPN that has been both an achilles heel and a

gold mine for Disney at different times. Right it it continues to be by far the largest profit generator for the Walt Disney Company, and really over the last twenty years it has been the most consistent profit generator for the company. Um, those days are over. UM. So what you have at Disney now is cord cutting h impacting the growth of their revenue, so putting pressure on their revenue growth. That's a problem, but it's compounded by the

fact that their costs are primarily fixed. I mean, think about the cost for ESPN. You think about these huge sports contracts with the NFL, with Major League Baseball, with all the college sports U leagues around the country. Those are big, big ticket items and they are a fixed cost over many years. And so if you're at at ESPN, you're seeing your revenue pressured and your costs you know, continuing to go up. So that's a real profit issue

for this company. It's been you know, really developing over the last two years, and quite frankly, investors are are very concerned about that. It's definitely impacted Disney, who you know, despite you know, the concerns at ESPN, the other two main businesses of the Walt Disney company. It's theme parks um and um uh it's movie business are both doing great.

But again investors are really focusing on on ESPN. All right, you want to do Fox, uh, twenty one century Fox because they're waiting on a deal in the UK for a Sky Yeah. The next big trade for the twenty one century Fox and Rupert Murdoch. You know, one of the great media moguls is to get even bigger, and that is to own complete control of be Sky b which is this big satellite provider in the UK and in Italy and Germany. UM and that is being that is under review. It was he was kind of thwarted

in this transaction about seven years ago. He's now come back and the expectation is that transaction will be approved. That would be a net positive for twenty one century Fox because a lot of those markets in Europe there's still more growth to go there in terms of pay TV subscribers. It is not saturated like the US market, and so a lot of investors believe that is a

better organic growth market than the US. Right now. Hey, Paul, you know, as as something that's been doing this more really more years than I know, you care to care to admit, is can you give some advice to people that are trying to sort of value these businesses When you've got companies like Amazon getting into con tent and you know, music from from Apple and so on, it's hard to kind of get your fingers around this, it

really is. I mean, we have, you know, the traditional metrics for media companies, whether that's price, price to earnings, or enterprise value. But those are well established and we know how to value you know, the Disneys of the world, in the Foxes the world, in the Comcast of the world, and we have historical benchmarks for when these stocks are

expensive or when they're cheap given their growth outlook. But when you bring in some of these new disruptive stories like Netflix, like Amazon that are coming into the movie business, and you take a look at even at the internet companies, the Internet companies are more media companies than they are technology companies. They are driven by advertising revenue, and they trade at different valuation multiples multiples revenue, and it's really

hard to compare. Thank you very much, Paul Sweeney. Here's our expert US Director Research, senior Media Internet analyst for Bloomberg Intelligence, Berkshire Hathaway. The shares are up nearly nine percent so far this year, but what will move them higher? Here to tell us more is Tara La Chapelle. Our Deal's column is for Bloomberg Gadfly and you can follow her on Twitter at Tara l. A c. H. Great

to have you with us, Thanks for coming into the studio. UM. The report from Berkshire Hathaway last Friday not greeted by the market with much enthusiasm. But this is a company that has what a hundred billion dollars in cash right which is almost exactly why it's not being greeted with enthusiasm, ironically, because the results were a little lackluster. We saw another underwriting loss in the insurance division, dragged down overall results.

So you know, the whole point of Berkshire's conglomerate is that all these other businesses offset the ones that are having, you know, going through difficult times, and this time it did drag down earnings a little bit um nothing to be concerned about, of course, but I think what it comes down to is they have almost a hundred billion in cash now and they're not really spending it, and so what are the high return opportunities out there, what's

the reason to own the stock and what's Buffett thinking next? So what do you believe is necessary for Berkshire Hathway, Because you know they Burlington Northern Santa fe uh acquisition. They just got eight hundred million in cash in the from the railroad. Um. Also I understand you know that they want to be even bigger in the energy business.

They're trying to acquire the Texas utility Encore, right, So that deal makes a lot of sense for Burlington Northern and that business has been great for them to total home run of an acquisition for Berkshire. But with all this cash, a deal like Encore, which I believe is around nine billion dollars, really isn't enough to move the

needle that much anymore. It's it's great for that division, but overall, when you have a hundred billion dollars of cash and it's just sitting there with these low returns, it makes sense for Berkshire to start thinking about bigger acquisitions. I mean, we could see the fifty billion to even a hundred billion dollar range. Realistically, it's not crazy to think that they could do something like that. The problem is finding a target that's worth that price and would

fit in with the conglomerate. Well, you mentioned in your story that you know, the equity investments that warm Buffett has made, whether it's craft Hinds, whether it's airlines, Apple and so on, that's all been they've done pretty well.

Oh those have been great. I mean Apple, It's so funny, right because Buffett for so long was opposed to investing in things that really didn't um weren't his expertise industrial companies or insurance businesses, right, So to to have Apple be sort of this incredible investment for them, and in kudos to their UM investing lieutenants there. But it's just

been really fun to watch. But even though those are doing really well again, it's like they need to think about a big acquisition to take in house, not just these equity investments that are doing well. But in doing your research, you find that investors in Berkshire Hathaway have a different criteria when it comes to what they do

with their money. They want to be there because warm buffets there, right, And I think that's where the issue is now because if the and you own the stock is because Buffett can take that money that all these businesses are throwing off and invest it far better than your return would be if he had paid, you know, a dividend or was buying backstock at these levels. Then I mean, we're looking at this and we're waiting for him to do that, and there really hasn't been a

whole lot of deal activity in the past year. So I mean, he did do the Precision Cast Parts deal. Now that's clothes. That's been doing very well for the manufacturing division. But it's like, Okay, well, what's next now? Because the reason the shareholder's own the stock is because they want to see him invest the money. And if he's not going to find a great target that's really going to move the needle, then it begs the question, you know, do does Berkshire start to pay a dividend? Right?

But but I guess my point is do investor's care. I mean, I understand from a theoretical point of view, but when you go to the annual meeting in Omaha, you don't find people saying, oh, I wish they do this, I wish they did that. No one's pounting the table saying, you know they I mean, everyone trust buffet. I think the problem is Buffett is going to be eighty seven this month, and people are starting to think about what

does Berkshire look like after Buffett? And I think he needs to sort of open the door for his successor to have that wiggle room, you know, have a good deal, opportunities, have the ability to pay a diven if if that's going to be the reality and this sort of slow growth world, um, I think Buffett sort of needs to start giving commentary on that. And I think that's what

people are looking for. It's not that they're thinking he's you know, not living up to what he's promised them or anything, but it's just that they're waiting to see, well, what's Berkshire look like now for the next ten, fifteen, twenty years. Maybe he's just waiting for the right pitch, right, I mean, because I note that just I guess it was over the last month when a Bank of America Merrill Lynch announced, you know that they were paying Buffett

because of his participation. And you know, he strikes these sort of idiosyncratic deals with preferred stock that you know, they really pay off, right, I mean, the Craft Hyans deal, the same thing. I mean, that's been great for Berkshire. I think we're waiting to see kraft Hians do something else and that Buffett will sort of bankroll the deal

and get another sort of high return preferred doc situation. Again. Um, but I think it's you need is a really big sell off, or you know, you need somebody get into a lot of trouble. But also I think it's it's a little more nuance on that now too, because you have all these big companies that are thinking about acquisitions themselves. So it's a much more competitive m and A environment right now. Buffett is used to someone calling him up and saying, you know, we want to sell to you,

here's our price. I don't think that that's as realistic nowadays. I think there's so much em and a happening, and people are paying incredible prices for some of these deals, and I don't know that Buffett is willing to you know, overpay of course, so it becomes a little more tricky.

And then also he's looking for companies with really solid management teams that want to be around for a really long time, and with all this activist investors out there and a lot of shake ups up top, and you know, I think it's just it's becoming a lot harder to find companies that fit his criteria. Thank you very much for coming in and spending time with us. Tara la Chapelle is our deals columnist for Bloomberg Gadfly, speaking about

a Berkshire Hathaway and that a hundred billion dollars of cash. Alright, no vacation when it comes to negotiations of what is the future of Sprint. And here to tell us more is Alex Sherman, our deal's reporter for Bloomberg News. Alex, always a pleasure. Maybe you could just give us the lay of the land, because there are a lot of moving parts here. You've got Sprint, T Mobile, Comcast, Charter and go ahead. I'm sure there must be something else

I'm forgetting. I'm sure there is him. You basically got the gist of it there, but already that's quite a bit so. Last week we did a bunch of reporting suggesting that Soft Bank and it's billionaire owners, Mathayoshi's son was considering buying Charter, which would be a huge deal, one of the largest deals ever probably let's say about a hundred and fifty billion dollars. After the attack on

a reasonable premium. Uh they Haffik has not made a formal bid for Charter, but what we reported was that it was at least considering it, and this would unite Sprint, the fourth largest US wireless player, with Charter, the second largest US cable provider, and give the United States its first true wireless flash cable combined company if it were

to happen. What my colleagues Scott Maritz and I reported last night was that in addition to this, Sprint has also resumed talks about a potential merger with T Mobile, something that has been sort of batted around by both sides for years. You should think of this as Sprint covering its basis before it spends a hundred and fifty

billion dollars on Charter. It probably wants to see if a deal with T Mobile can be done, because there are so many synergies in this deal that they would be doing themselves a disservice if they didn't look very hard at it. So I think that's where we are right now, where Sprint is looking at both options. Well, what about just let's talk about Sprint for just a second, because I understand in the last quarter they lost thirty

nine customers. Is there something inherently broken at Sprint? There is something inherently broken at Sprint as Sprint stands today. I mean, this has been a long time money losing operation. The the bet on Sprint is that they are well positioned for tomorrow's wireless world. So today we all have what's known as an LTE standard or other people call it four G. In a five G world, this would

be you know, five G standing for generation. Uh. Many people feel like Sprint has the correct wireless spectrum or wireless air waves that if combined with so called small cell technology, which is owned in large part by cable companies but also Sprint on some uh, that Sprint can

actually be a much strong, younger competitor. However, the finances are what they are today, and that's why Masayoshi's son, the founder of soft Bank, who owns plus of Sprint, has been so aggressive in trying to do a deal because Sprint as it stands today is not well positioned at all. So it needs to be a much more

robust company. You combine that with T Mobile, you combine it with Charter, you combine it with some other company, then Sprint can sort of get from where it is today to the ties when five G technology will kick in, and theoretically Sprint would be a much stronger company then because of the airwaves it owns I like this idea that you know, it's all in the future, right, it's all in the creation of this rhetorical Uh sort of makes sense a program, but you know, it just makes

me think of John Ledger and T Mobile because when he came in, people were leaving T Mobile for dead, but they actually took some initiatives that have not only changed the industry but have forced the competition to follow them. Why doesn't Sprint take a leaf out of their book? Well, that's a great question, and I suppose they merged with T Mobile would do that because in the end, here Mateyoshi Son, who has a three hundred year plan has uh and that's not an exaggeration. He literally has a

three hundred year plan for his company. UM has two options here, UH, If you buy charter Mateyoshi Son would stay in control of this new company UH, and therefore would be able to dictate its terms. If they merge with T Mobile, so I think would actually have to sell Sprint and it would be run by T Mobile

and John Ledger. So I think that the the the idea there would be Sprint would say, look, we we understand here that this combined company is stronger, and frankly, T Mobile, you've done a better job than us over the past few years of running this company. It's certainly possible that Sprint could have done exactly what T Mobile did under price, be very aggressive, have a much better

marketing plan, sort of failed on all of these. Uh if if if you follow John Ledger on Twitter, he's constantly mocking Sprint and it's sort of second rate promotions and also it's second rate network. Uh So, the idea here then would be this combined company would in fact be run by Ledger and Sun would give up on Sprint. He would still own some of the company, but he would no longer be the controlling shareholders. So very much

two different outlooks there. Some people tell me the idea would be after Sprint bought Charter, if that's the plan that happens, it would then go after T Mobile, and in that case stop think actually would be able to maintain control of the company because it would be so much bigger than T Mobile. Of course it is still

to be determined. If T Mobile's German owners, Deutsche Telecom, would even be interested in selling the company, we know for the time being they are not, which is why the Sprint Temo deal may actually happen with the Germans buying and consolidating the new Sprint Temo company. Of course, that wouldn't mean anti trust regulations or review. Yeah, why doesn't Mastios he sagn just hired John Leger. Well, that's

a good question. Um. I think part of the reason is that he feels like Stephen John Leger at this Maybe it's too little, too late. Look, he did hire a person named Maurice Claure excuse me, Marcello Claure. Um, I would say a few years ago at this point, to try to turn around the net worth of previous CEO's name was Dan Hessey. Uh So, the idea at the time was to bring in someone that Massio she soun was familiar with to to turn around the company.

And look, if you if you go on a pure stock performance, even though Sprint continues to struggle, actually you could make a very strong case that Sprint has turned it around. I mean their shares were training around two dollars a share at one point now eight dollars and seventy three cents now a lot of a lot of that m and a premium, but still tapped off the Clare and the Sprint team for getting the share price up. We gotta leave it there. Alex Sherman, our tech media

and telecom m and a reporter from Bloomberg News. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio