UTC raises $2.25 billion to fund GE acquisition

Signal that strategic buyers have good access to inexpensive debt
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Thursday, February 25, 2010

HARTFORD, Conn.—United Technologies has sold $2.25 billion in debt in order to raise money for its announced acquisition of GE Security. Bill Polk, managing director at investment bank CapitalSource, said the terms of the deal—$1.25 billion of 10-year notes priced to yield 87 basis points over comparable U.S. Treasuries and $1.0 billion of 30-year bonds priced to yield 109 basis points more than U.S. Treasuries—are “extraordinarily cheap capital against what a typical buyout firm has to pay.”

For example, a 30-year treasury bond is priced today to yield 4.58 percent, so the UTC note would be priced to yield 5.67 percent. Ten year notes are currently priced to yield 3.64 percent. The UTC notes would yield 4.51 percent.

Considering that UTC reported $4.5 billion in cash on hand in its last filing, it could be said that the company doesn’t need the capital being raised to make the GE Security acquisition.

This may indicate, Polk said, that a company like UTC, which has a strong balance sheet and cash on hand, has access to capital that private equity firms and leveraged buyout groups do not have, and thus “you’ll see in the acquisitions a heavy weighting toward these strategic buyers.” Private equity “doesn’t have anywhere near the same access to debt that they had in 2006, or early 2007. It’s improved a lot in the last 12 months, but it’s still not where they were.” It could also be that UTC has more acquisitions lined up for the near future and doesn’t want to deplete its cash reserves.

The underwriters for the issue are Banc of America Securities LLC, BNP Paribas Securities Corp., Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Goldman, Sachs & Co., HSBC Securities (USA) Inc., J.P. Morgan Securities Inc. and RBS Securities Inc. Each underwriter, through its representatives, Banc of America Securities LLC and Citigroup Global Markets Inc., has severally agreed to purchase from the company the principal amount of notes.

But what about the idea that bigger deals are harder to put together in this environment? “This is a global syndication,” said Polk, “the investors in this debt are money market funds, institutional investors that aren’t going to be playing in smaller middle market transactions. It’s different. It’s not fair to compare this to a security alarm company that’s raising $50 million or $100 million dollars.”

Does this say anything about the security industry as a whole, that this much debt would be bought to fund a security company acquisition? “It says broadly that security is generally perceived relative to other industries as a safer port in the storm, but it’s more evident of the fact that companies like UTC have greater access to the capital markets as large corporate strategics.”