Did You Know? Reorg Launched an M&A / Special Sits Product

Over the past four years Reorg has launched a number of products in the credit space. We have big plans to launch more in the future. With that said, we saw an opportunity to launch a product around M&A, antitrust and special situations using Reorg's formula of amazing reporters, analysts and lawyers combined with innovative technology. 

You can learn more about the new product at: Event-Driven.com. You can request a trial here: Event Driven Trial Sign Up

I produced a sample of a story we wrote yesterday below - if you have any questions feel free to reach out to me or your Reorg sales contact. Thanks! - Kent

COL/UTX Ability to Provide Integrated Systems May be Crucial Distinction for Regulators

Event Driven Takeaways
  • The COL/UTX divestiture package will most likely be in the range of $300M as United CEO Gregory Hayes stated in an interview with CNBC and the $850M divestiture limit in the merger agreement.  While this is small relative to the $30B deal value, the product lines involved will most likely touch DoD contracts raising single source supplier concerns for critical systems.
  • The antitrust/contracting concerns will be seen across a number of small verticals within the aircraft system software space, specifically “flight bags”, that aggregate system data for flight crews. These antitrust concerns will come down to issues of substitutable competitive products and how important system integration is to the final customer.
  • Honeywell is the primary competitor for United Technologies across all verticals including the verticals that overlap with Rockwell. There are also smaller component manufacturers that compete for government contracts, and should reduce antitrust concerns on overlap.
  • The termination date for the deal is September 4, 2018, which can be extended by six months to March 2019. Projected close for the transaction is 3Q2018. Regulatory scrutiny around the divestiture package could extend the review timeline past the 3Q projected close.

Avionics systems appear to be the primary overlapping verticals, specifically electronic flight bag systems, for the combined COL/UTX. While there are many substitutable components among these systems, there are limited fully integrated systems available that cover the entire aircraft the way the United systems do. This will raise both competition concerns and defense readiness concerns, which will be complicated to mitigate, and could extend the review timeline.

The DOJ and DoD reviews of the Rockwell/United deal will scrutinize narrow individual product markets, but importantly, may hinge on the combined companies’ ability to provide integrated systems for planes, something that vastly narrows the list of alternative providers. When a product is part of an integrated system so that a non-integrated component does not have the full functionality of the system, the product is not a full substitute.  

As we discussed in our previous report, DoD single source supplier review could be a sticking point in the regulatory review of the Rockwell/United deal. Civilian antitrust regulators have the final say, but the DoD’s analysis on the competitive effects of the transaction will carry significant weight. Both agencies will look at the competitive overlaps among the companies’ product lines, and the DoD will specifically look at readiness concerns around single source suppliers.

Both Rockwell and United offer electronic flight bag, or EFB, products that aggregate avionics data for flight crews. Rockwell’s SSR-7000 Secure Server Router “combines the capabilities of traditional wireless data transfer and avionics interface devices with ultra-secure EFB and crew wireless access.” United’s Tablet Electronic Flight Bag platform “enables real-time data exchange between [EFBs], aircraft avionics and airline operations while lowering costs and securely protecting data.”

Similarly, both companies offer aircraft data management solutions for route tracking and optimization. Rockwell’s ADS-3000 Air Data System “computes and displays all parameters essential to flight,” including airspeed and altitude. Rockwell also touts its products’ compliance with Automatic Dependent Surveillance-Broadcast (ADS-B) regulations, which cover traffic, weather, and flight information. United’s Aircraft Data Management (ADM) solution offers “continuous in-flight position monitoring and aircraft health reporting.” Furthermore, United’s aircraft interface device (AID) includes the ability to access “key aircraft avionics data such as GPS position, ground speed and aircraft heading,” and also facilitates transmission of weather information and flight performance tracking.

There are many small component manufacturers that make substitutable parts of the EFB system, including: Adobe, Advanced Data Research (ADR), Airbus, Air Data Solutions, Aircraft Data Fusion, Aircraft Management Technologies (AMT), Astoria Software, Approach View, ARINC, Astronautics, Avrotec (In Development) Boeing/Jeppesen/Astronautics, CMS Electronics, Control Vision, Echo Flight, Eflightsystems, LLC, Flight Deck Resources, Flight Explorer, GSCS, Hangar B-17, Hewlett-Packard, Honeywell, ION Systems, Jeppesen, LIDO, Maestro Aviation Limited, NavAero, On Board Data Systems, Panasonic, Paperless Cockpit,  RMS Technology, Rockwell Collins, Sporty’s Pilot Shop, Stenbock & Everson, Teledyne Controls, Ultra-Nav Universal Avionics, WSI, WxWorx.

However, the true value of the proforma United EFB system will be that the analytics are integrated from the tail to the nose of an aircraft. The regulators will determine the degree to which a product must substitute for the original product's functionality. This is a central principle of regulatory analysis of product substitution.

While many of these manufacturers make individually substitutable systems, very few offer full integration. Honeywell is the only competitor with a fully integrated system of equivalent quality. For antitrust purposes this is an important distinction, because regulators may be concerned with full system functionality in which case substituting an individual system will not alleviate competitive concerns. This is even more true for DoD review, as United makes EFB systems tailored to defense purposes such as EFB integration with night-vision, and weapons systems. The issue of integration could be a problem if there is a custom system for defense purposes that only works with the larger EFB system provided by United.

The EFB systems are also important for defense efforts relating to autonomous flight systems.  In the current form EFB systems collect and analyze data from an aircraft for human consumption. EFB systems are made up of sensors, analysis, and user interface. As more flight systems move toward autonomous systems, the user interface will become less important, and the integrated system analysis will grow in importance. This transition from manned flight systems to autonomous flight systems will increase the importance of integration, and make the issue of substitutable components more prominent.



hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.