Loeb Sees $20 Billion Potential in United Technologies Split

(Bloomberg) -- Dan Loeb’s Third Point is calling for United Technologies Corp. to break apart, saying that a split into aerospace, elevator and climate-controls companies would boost shareholders by $20 billion.

Having such disparate businesses under one corporate roof has led to “poor management execution” and a lagging share price, Third Point said Friday in a letter to investors. The activist firm said it took “a significant stake” in United Technologies late last year, a position that was first revealed in a regulatory filing in March.

Third Point has engaged the board “to express our concerns about the company’s weak operating performance and the inherent disadvantages of its conglomerate structure,” the firm said. An assessment of the company should “lead the board to the same inescapable conclusion that UTC should be split into three.”

The pressure from one of the best known activist investors raises the stakes for United Technologies, which is already weighing dramatic changes. Chief Executive Officer Greg Hayes has said the board will consider options -- including a potential breakup -- after the expected closing this year of its $23 billion acquisition of Rockwell Collins Inc., one of the biggest aerospace deals in history.

The Farmington, Connecticut-based company said Friday that it “disagrees with several of the assertions” made by Third Point, while remaining “always open to the input of shareholders.” The company still plans to review the portfolio this year and will provide an update “as soon as practicable.”

United Technologies, with a market value of $95 billion, climbed 1.3 percent to $119.23 at 12:35 p.m. in New York. The shares have advanced 10 percent since Hayes was named as CEO in late 2014, trailing the 23 percent advance of a Standard & Poor’s index of industrial companies.

Activists Circling

Hayes surprised investors in February when he said a three-way breakup may be needed to boost shareholder value. While he said the move wasn’t driven by outside agitators, activists have been eyeing the stock. Bill Ackman’s Pershing Square recently took a position in United Technologies, Bloomberg News reported in February.

The manufacturer -- maker of Pratt & Whitney jet engines, Otis elevators and Carrier air conditioners -- seemed to back off its stance in March as Hayes highlighted the hurdles to a breakup. In an investor meeting, he said there would be a “significant amount of one-time costs” to split United Technologies. Debt-refinancing costs would account for the biggest chunk of a burden that would run as high as $3 billion, he said.

United Tech’s Breakup Waffling Is Getting Old: Brooke Sutherland

While Third Point said it was encouraged by the company’s willingness to consider major changes, Loeb’s firm called the CEO’s assessment of breakup-related expenses “surprisingly high.” Debt could be refinanced for about $200 million, Third Point said. The fund also downplayed the cost of other obstacles to a split.

“UTC’s management has acknowledged the disconnect between the company’s intrinsic value and share price but it seems less open to a three‐way split solution than shareholders might expect,” Third Point said.

DowDuPont Value

Separately, Third Point also said in the letter that it believes DowDuPont Inc., which remains its largest position, is undervalued despite several positive developments since its merger closed in August.

The fund said three comparable companies that are publicly traded -- LyondellBasell Industries NV, 3M Co. and Monsanto Co. -- have a combined enterprise value of about $234 billion. That’s 40 percent higher than DowDuPont’s, despite analyst estimates that DowDuPont’s future spins are similar in scale, Third Point said.

“We expect this value gap to close over the next 12 months as synergies are realized and the three spin‐offs are finalized,” Third Point said. It said it was also happy with the progress at Lennar Corp. and Dover Corp. since it invested in those companies.

©2018 Bloomberg L.P.

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