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Tuesday, July 21, 2015

Sikorsky Sale vs. Spinoff? Simple Math

The decision to sell Sikorsky Aircraft rather than spin it off as a standalone company came down to simple math, United Technologies Corp. President/CEO Gregory Hayes told financial analysts today. Talks about the manufacturer’s disposition had been underway for nearly a year before yesterday’s announcement of its sale to Lockheed Martin for $9 billion. Speculation was that UTC’s tax bill on gains from Sikorsky (which it has owned since the 1920s) would make a sale prohibitive. But Hayes said math argued against a spinoff, even it averted a big tax hit. UTC figured Sikorsky’s value at $600 million. Subtract from that $100 million for the cost of a standalone company’s IT, finance and administrative functions (which now are covered by UTC), Hayes said, and you’re left with a $500 million company. If a standalone Sikorsky’s stock traded at 10 times that value (which Hayes said is a standard market multiple for defense contractors), it would have market value of $5 billion. Add a possible market premium, and a spun-off Sikorsky’s price tag could be as high as $5.75 billion. But that value “wasn’t even certain,” Hayes said. UTC will clear $6 billion—after the tax bill is paid—if the L-M deal goes through. That combined with the fact that the L-M deal “is certain, it’s today, it’s cash made a lot more sense than the risk associated with a spinoff,” Hayes said. “We did the math and it came out to be pretty simple at the end.”
 
 
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