TheChek News Flow

Climate control solutions company Lennox International [NYSE:LII] faced some consolidation questions on yesterday’s 3Q18 earnings call. CEO Todd Bluedorn was asked to clarify some remarks made at a recent conference about the potential for consolidation among the top residential players. The executive said he thinks that York – part of Johnson Controls [NYSE:JCI] – has residential market share in the single digits, “so I think they could combine with other players in the industry”. He added that “Sterling could combine with us”. Asked later about United Technologies’ [NYSE:UTX] Carrier division, Bluedorn said that he believed that its market share started in the double digits, but wasn’t sure. However, that didn’t stop the executive from mentioning the possibility of Carrier combining with either York or LII. Later, Bluedorn mentioned clear logic for cost cuts from M&A, highlighting that, unlike most of its competitors, LII has a campus in Mexico, which can be used to lower costs. The comments on consolidation were mostly hypothetical situations, so it doesn’t sound as if any serious talks are happening behind the scenes. Still, with increased activity in the industrial space recently, specifically climate, LII’s view of consolidation possibilities is certainly interesting. Bluedorn did note that LII is committed to maintaining leveragethe 1.5x to 2x range in order to keep its investment grade rating, but said that, if “we had something that could create real shareholder value, like an industry-consolidating acquisition, we would think about it.”

Arconic [NYSE:ARNC] shares were trading up 1% in the premarket after Reuters reported that it has received an offer from Apollo Global Management [NYSE:APO] that values the metals manufacturer at between USD 23 and USD 24 a share. However, a report out of the New York Post stresses that bidders are leery of a potential liability tied to the 2017 Grenfell Tower fire in West London that has been uncovered during due diligence late into the process. This report also noted that APO was the most interested bidder. We would note that there are two other potential issues that may give suitors pause. First, with debt funding expected to be near USD 19bn, the recent rise in rates will increase costs. Asset sales – ARNC already plans to sell its buildings and construction systems (BCS) business – could help offset some of that debt. Second, the Trump administration’s aluminum tariffs are hurting ARNC and there is no sign that there will be a near-term resolution of the trade war. China continues its tough talk, with officials telling US investors yesterday that China doesn’t fear a trade war.

Another deal negatively influenced by tough trade talk is United Technologies’ [NYSE:UTX] proposed acquisition of Rockwell Collins[NYSE:COL]. The Flash flagged this deal in late July as facing potential issues. UTX had said that it expected the deal to close by the end of September. Now that we are almost into November with no Chinese approval, investors are getting nervous. The net spread on the deal has blown out, going from near 3% to almost 8%. This news service previously reported that the deal is waiting for ministerial-level sign off at China’s State Administration for Market Regulation (SAMR). The termination date for the transaction is 4 March 2019. Operationally, though, UTX continues to fire on all cylinders. This morning, it reported 3Q18 results that beat analyst expectations and also raised FY18 guidance.