Third Point Opposes United Technologies-Raytheon Merger -- Update

By Allison Prang and Thomas Gryta 

Hedge fund Third Point LLC panned United Technologies Corp.'s plan to merge with Raytheon Co. and is calling for the industrial conglomerate to rethink the transaction.

In a Friday letter to United Technologies's board, Third Point Chief Executive Daniel Loeb said UTC merging with Raytheon was a "baffling change" of strategy, given UTC's stated aim to make itself more focused.

Fellow activist William Ackman registered his own opposition to the deal earlier this month, shortly after it became public. Combined, the funds own about 12.3 million shares of UTC, or about 1.4% of the shares outstanding.

The Connecticut-based company is streamlining its operations with a series of deals. Last year, it acquired aerospace company Rockwell Collins and merged it with its own aviation businesses, including engine maker Pratt & Whitney. It is now spinning off its Otis elevator and Carrier building systems divisions.

The Raytheon deal, billed as a merger of equals with no premium for Raytheon shareholders, would create a company with a valuation exceeding $100 billion.

"Third Point will not support the merger in its current form and plans to vote against it," said Mr. Loeb's letter.

Shares of United Technologies were up about 1% in Friday afternoon trading, while Raytheon's shares fell more than 2%.

"We do not agree with the assertions and conclusions in the Third Point letter," UTC said in a statement. It highlighted that the board reviewed and unanimously approved the transaction, with a close still expected in the first half of 2020. Raytheon declined to comment.

In the letter, Third Point questioned the strategic and financial rationale of the deal, criticizing UTC for planning to issue shares before they can benefit from the spinoffs. It also warned that the complicated combination would likely distract senior executives.

"Management has had multiple execution challenges and has repeatedly come up short on its long-term financial targets by a wide margin," the letter said. "We are concerned that execution will slip further as management becomes increasingly distracted."

Mr. Ackman, of hedge fund Pershing Square Capital Management, said he "cannot comprehend the strategic logic" of the transaction.

Wall Street analysts have generally cheered the deal, but some have warned about execution risk and questioned the strategy.

The new company, to be called Raytheon Technologies Corp., would create the world's second-largest aerospace-and-defense company by sales behind Boeing Co.

Executives have said the combination would cut costs and protect against a slowdown in demand. UTC shareholders will own 57% of the company.

Third Point criticized the leaders of both companies Friday. It questioned Raytheon CEO Tom Kennedy's comment that the company would be out of business in 10 years if it used its balance sheet to return cash to shareholders.

It also said Greg Hayes's tenure as UTC CEO, and finance chief before that, has been marred by poor results. Mr. Loeb also said that Mr. Hayes had previously promised the fund that breaking up the company would begin a transition to a new CEO within the next two years.

"Indeed, this potential upgrade in management formed part of the basis for our investment thesis and expectation of improved operational results in the future," the letter said. Instead, Mr. Hayes will become CEO of the merged company and add the title of chairman after two years.

Write to Allison Prang at [e-mail] and Thomas Gryta at [e-mail]

(END) Dow Jones Newswires

June 28, 2019 15:00 ET (19:00 GMT)

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