Tue 10/09/2018 13:08 PM
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Takeaways
 
  • The review of Rockwell Collins by United Technologies was re-filed with SAMR around June 29, 2018. The refiling was largely due to the restructuring of MOFCOM into SAMR. This restarted the 180-day review cycle for the deal, putting the decision date as far out as December 29, 2018.
  • While market testing began by the Chinese regulator in August 2018, there has been no information showing pushback against the deal from Chinese companies.
  • Assuming that timing is on track with the 180-day SAMR review, and there hasn’t been notable domestic pushback, the only significant risk is associated with potential political retaliation in the ongoing U.S./Chinese trade war.

United Technologies originally filed its notification with the Chinese Ministry of Foreign Commerce, or MOFCOM, in December 2017. The review was originally slated to end in June 2018 following the end of MOFCOM’s 180-day review period. Two developments subsequently impacted the review: (1) trade tensions escalated between the U.S. and China, and (2) China restructured its competition authority by creating the State Administration for Market Regulation, or SAMR. United Technologies was required to file for a completely new review with SAMR, despite the review that had already taken place under MOFCOM. Under the new timeline, SAMR’s review for the transaction can be expected to take as long as the full 180 days, which could delay a decision until December 2018.

The timing of the Chinese review is neutral for the overall risk of the transaction as it indicates that the prolonged review of the deal is related to bureaucratic procedure rather than political risk. Therefore political risk must be assessed independently of timing risk.

While there have been reports of market testing occuring in August, to date there has been no indication that Chinese competitors to United Technologies or Rockwell Collins have raised any issue with the combination. Any domestic concerns around the deal would center around the Chinese aircraft industry. The Chinese aircraft industry relies on supplies from Rockwell and United for the COMAC C919 and ARJ21 aircraft. Additionally, Rockwell has a joint venture that provides C919 with audio, radio tuning, radio altimeter and solutions. Furthermore it is unlikely that any Chinese company would be able to compete with Rockwell given the restrictive regulations surrounding defense contracting. These are indicators of little risk of domestic pressures resulting in a SAMR block of the transaction.

Geopolitical risk related to trade tensions remain but are difficult to measure. Since the onset of the trade war in spring 2018, we saw Qualcomm’s acquisition of NXP blocked by SAMR, and Linde’s acquisition of Praxair approved. This indicates that SAMR is not blocking all deals, but giving enhanced scrutiny to deals such as NXP where there is significant domestic push back due to the deal’s impact on the Chinese semiconductor industry.

Therefore, there is little risk indicated by the timing of the review as it is tied to procedure, and there is little indication of overt domestic political risk. However, the degree of geopolitical risk of retaliation against U.S. trade policy remains opaque.

--Nils Tracy
 
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