Will UTC buy Nortek?

Will UTC buy Nortek?

The Wall Street Journal, citing unnamed sources, says it's in talks to do so for around $1.2 billion. I talked to some folks in the past few days who say the purchase, which may not make sense on the surface may indeed make sense. Other financial reports, such as the Motley Fool, concur.

Nortek is the parent company of well known access control, security and automation brands Linear, 2GIG and Go!Control. Those brands fall under the Nortek Security and Control division. It's  a global diversified company with a current market cap of $1.3 billion and an enterprise value of $2.7 billion, and the bulk of Nortek's business falls outside security, it also does HVAC, air management and AV.

Based in Hartford, Conn., United Technologies Corporation is a global $81 billion company that makes building systems and aerospace industry products. Its segments include:  Otis elevators; Pratt & Whitney;  UTC Aerospace Systems and UTC Climate, Controls & Security, which in addition to security does HVAC and refrigeration. UTC owns access control provider Lenel (as one person I spoke to called it--the darling of the UTC security portfolio) and intrusion and smart home provider Interlogix.

UTC bought GE Security in 2010. Here's a Q&A we did at the time.  Two years later, UTC sold its fire and security integration business (Red Hawk) to a private equity group.

UTC recently sold its Sikorsky helicopter division for $9 billion, so they've got money to invest.

Neither Nortek nor UTC are commenting, but plenty of folks outside of the businesses are talking about it.

People I spoke to said that UTC went looking for Nortek—Nortek was not actively looking for a buyer. They don't believe that it is the security part of the business that is necessarily driving the deal—but rather, the fact that Nortek's lines of businesses line up with UTC's Climate Controls and Security division, though there would definitely be some overlap with 2GIG and Interlogix.

As The Motley Fool explains it, what's driving the deal is that the numbers make sense.

From the report: “…Nortek could be a pretty nice bargain. Bought for today's $1.4 billion valuation, Nortek would cost UTC less than 0.6 times Nortek's annual sales. UTC stock, in contrast, costs more than twice as much, at 1.3 times sales.
Meanwhile, although it earns no net profits, Nortek does earn operating profits (i.e., it would have been profitable but for the cost of interest, taxes, and various one-time items). In fact, at its current operating profit margin, Nortek earned about $123 million in operating profit on its revenues last year. If, after buying Nortek, UTC is able to improve the latter's operations so as to extract something like the 16.5% margin that UTC's own Climate, Controls, and Security business achieves, then this would work out to $413 million in annual profits from UTC's new subsidiary -- $290 million better than Nortek made on its own.”

Will the deal happen? I have no idea. But I guess I need to be prepared for another ISC West booth visit where I have to learn, again, how the UTC security business has been realigned.