Pratt & Rolls-Royce in New Relation - Analyst Blog

Pratt & Whitney, a group company of United Technologies Corp. (UTX), and Rolls-Royce, a global provider of the power systems, have reorganized their participation in IAE International Aero Engines AG (IAE). The IAE is engaged in the production of the V2500 engine for the A320 family of aircraft.

As per the agreement made by the companies, Rolls-Royce will sell its equity and program shares in IAE to Pratt & Whitney for $1.5 billion. Pratt & Whitney plans to discuss a potential offer of a part of the shares to be acquired with MTU Aero Engines AG (MTU) and Japanese Aero Engines Corporation (JAEC), IAE partners of Pratt & Whitney. In addition to the agreed sales price for the next fifteen years after the completion of the deal, Rolls-Royce will be entitled to receive a fixed amount for each hour flown by the current installed fleet of V2500-powered aircraft.

Though IAE will now be led by Pratt & Whitney, JAEC and MTU, Rolls-Royce will remain responsible to IAE and its customers. Rolls-Royce will continue to be responsible for the production of high-pressure compressors, fan blades and discs and also for the delivery of engineering support and final congregation of 50% of V2500 engines. IAE was formed about thirty years ago and since about 4,500 V2500 engines have been put in service and approximately 2,000 are on order.

Apart from this restructuring, Pratt & Whitney and Rolls-Royce entered into a new partnership agreement to power future mid-size aircraft, with capacity of 120 – 230 passengers. A joint venture company will be formed in which both the companies will have equal share and will produce new engines for the next generation of aircraft, replacing the existing mid-size fleet.

The completion of both the transactions is subject to some various closing conditions, including regulatory approvals.

United Technologies is a global provider of high technology products and services to the building systems and aerospace industries. The company’s growth has been attributed to acquisitions and to the internal development of the existing businesses. The major competitors of United Technologies are Boeing Co. (BA), BorgWarner Inc. (BWA), General Electric Co. (GE), Honeywell International Inc. (HON).

We currently maintain our Neutral rating on United Technologies, with a Zacks #3 Rank (short-term Hold recommendation) over the next one-to-three months.

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