BOSTON/NEW YORK United Technologies Corp (UTX.N) agreed to sell its Rocketdyne space unit to GenCorp Inc GY.N, a maker of aerospace propulsion systems, for $550 million, the companies said on Monday, a deal that will fund a slice of United Tech's largest-ever acquisition.
Rocketdyne, the world's largest manufacturer of liquid-fueled rocket propulsion systems, is one of three units United Tech Chief Executive Louis Chenevert put on the block in an effort to fund the diversified U.S. manufacturer's $16.5 billion takeover of Goodrich Corp GR.N.
GenCorp, whose shares jumped nearly 15 percent to a market capitalization of roughly $460 million, said the deal would almost double its size. United Technologies, which will sell the company for $150 million less than it paid for it more than seven years ago, saw its shares decline more than 1.5 percent.
GenCorp Chief Executive Officer Scott Seymour said the combined company would be better positioned for a highly competitive marketplace and could provide more affordable products to customers.
Rocket motor makers such as GenCorp and Rocketdyne have faced an uncertain outlook since the U.S. space shuttle program ended last year. Industry executives have said consolidation is needed for the space industry to survive a tough environment.
The companies said they expect the deal, first reported by Reuters last week, to close in the first half of 2013.
Hartford, Connecticut-based United Tech is still working to sell the industrial pumps and compressors business of its Hamilton Sundstrand business, as well as Clipper Windpower.
When United Tech unveiled plans to buy Goodrich last year, it said it planned to issue $4.6 billion in new shares to help pay for the deal. But shareholders opposed that.
In June United Tech sold $1 billion in convertible notes to fund the deal.
The company last month said it expected to reach a deal to sell the pumps and compressors operations in the current quarter, with Chief Financial Officer Greg Hayes saying there had been "lots of interest" in the business. Sources have told Reuters the business could be worth up to $3.5 billion.
Investors may get a deeper look into United Tech's progress in selling the other units on Thursday when the world's biggest maker of elevators and escalators reports second-quarter results.
Analysts, on average, look for essentially flat revenue and earnings at United Tech, as Europe's economic problems and a slowing Chinese economy crimp sales of everything from Otis elevators to spare jet engine parts.
United Tech shares were down 1.8 percent to $72.91 on the New York Stock Exchange. GenCorp shares surged about 15 percent to $7.69.
FUTURE FOR ROCKETDYNE
The Rocketdyne deal comes more than seven years after United Tech bought the business from Boeing Co (BA.N) for $700 million in cash.
Rocketdyne makes liquid rocket motors to launch satellites into space but has also begun to diversify into solar and gasified coal energy technologies. GenCorp's Aerojet subsidiary and Alliant Techsystems Inc ATK.N produce solid-fuel rocket motors.
Several people familiar with the process told Reuters previously that United Tech received multiple bids for the Rocketdyne business in late March, with GenCorp and private equity firms among the interested parties.
Talks resumed in earnest with GenCorp after a prospective deal with a private equity buyer fell through, the sources told Reuters.
Defense consultant Jim McAleese said the deal with GenCorp was significant because it would help preserve "a critical, but atrophying, capability since Rocketdyne's liquid rocket engines power both the Air Force's Evolved Expendable Launch Vehicle and NASA's Manned Spaceflight."
He said he did not expect much objection to the deal since it would "immediately strengthen competition, by creating two strong competitors for liquid and solid rocket engines," the combined Aerojet-Rocketdyne business and Alliant Techsystems.
"This is exactly the type of modest consolidation that (the U.S. Department of Defense) has been publicly seeking to increase competition and reduce overhead, which could not be more timely given the growing threat of sequestration," McAleese said, referring to $500 billion in defense spending cuts that could come in January.
Deutsche Bank (DBKGn.DE) and Moelis advised United Tech on the Rocketdyne sale. GenCorp was advised by Citigroup (C.N). Citigroup and Morgan Stanley (MS.N) are providing GenCorp with fully committed financing to support the acquisition.
Separately, Japan's All Nippon Airways (9202.T) said on Monday it had grounded several Boeing 787 Dreamliners after discovering a problem in their engines relating to a gearbox manufactured by United Tech's Hamilton Sundstrand arm.
(Reporting By Scott Malone in Boston, Nick Zieminski and Soyoung Kim in New York, and Andrea Shalal-Esa in Washington; Editing by Lisa Von Ahn and John Wallace)