If Honeywell (HON) wants to own more of the plane, it should consider Alcoa (AA) if United Technologies (UTX) says no.
Here's why. Once Alcoa splits into the commodity business and the engineered proprietary business, Alcoa will be easy for any aerospace company to swallow.
Now, it is true there is much more to the story than just aircraft, even as a big airplane might have as many as two million fasteners made by Alcoa and its acquisitions of Firth Rixson and RTI Metals to become a principal metals supplier to aircraft engine makers -- hence the $1.5 billion long-term supply contract with Dividend Stock Advisor portfolio holding General Electric (GE) for these specialty alloys. Alcoa will now have $5.6 billion in aerospace sales which, while nowhere near as big as United Technologies' $14 billion business, is still a nice needle mover.
Of course, Honeywell sees so much more synergy in United Technologies than just aerospace. Its climate control business dovetails perfectly with United Technologies' Carrier division. They both have amazing fire and safety businesses. But in the crown -- the aircraft business -- the jewel is the innovative Geared Turbofan Pure Power engine, which is a game changer because of its lower fuel burn, reduced engine noise and improved environmental emissions.
I know, it seems strange in a world where you figured there's no innovation to speak of that could leapfrog any other supplier, but this Geared Turbofan is the real deal and it is not a coincidence that Honeywell wants to strike now, before you start seeing the big numbers this engine generates.
However, the more I look at this merger the more I think it will be challenged, because Honeywell and United Technologies will simply own too much of the plane. I don't know how it would clear antitrust. Plus the climate controls combination might be a deal killer, too.
That's where Alcoa comes in. While not as highly value-added as United Technologies, Honeywell can certainly insert the Alcoa fasteners and metals business in its aerospace tool kit as it can use Alcoa's light-weighting technology to abet its turbo business.
Now, I wouldn't suggest this idea if I thought that Honeywell would be able to get UTX, because that's a much better fit. But I do think that once Alcoa divests itself of the down and dirty aluminum and alumina business, you are going to see a company with tons of supply orders to airplanes that could dovetail with Honeywell's business.
I was surprised to see Honeywell want to take this big a swing at this stage in the game. Dave Cote gave no sign that he was about to pull the trigger on the largest combination in aerospace history since McDonnell Douglas merged with Boeing (BA) in 1997. His last quarter was superb, and if anything I expected little tuck-ins and nothing more.
But if the goal is to get a bigger piece of the aerospace pie and still have value-added technologies, I think Alcoa would easily pass muster and sure wouldn't cost much at all, as it is an $11 billion company with lots of that market cap going away.
Given the depression that Alcoa's stock's been in because of the commodity side of the business, I don't know if it even makes sense to wait. The spin-off plans are done. It's turnkey. And if it isn't done by Honeywell, I bet someone else will do it.