Earlier this month, I laid out three good reasons why industrial conglomerate United Technologies (NYSE:UTX) might want to sell its Sikorsky helicopter division --- and four better reasons not to. On Friday, the list of arguments against selling Sikorsky just got longer -- 20 billion reasons longer.
As reported on DefenseNews.com Friday, Turkish Prime Minister Recep Tayyip Erdogan has just announced the conclusion of an agreement to hire Sikorsky to build his country 109 helicopters for an initial $3.5 billion. The helos in question will be a variant of Sikorsky's successful S-70 Black Hawk International platform, specially tweaked for Turkish needs, and designated the "T-70." Upon delivery, they will be parceled out to multiple Turkish government departments -- primarily the Turkish military, certainly, but some of the helos will also go to Turkish police forces, and even to the national Firefighting Department.
What does it mean to you?
Sikorsky's been waiting to get this contract finalized since at least 2011, when Turkey said it was all but ready to conclude the deal -- but had seen it stalled by "US corporate and other bureaucracy." Now that it's going through, though, what does it mean to Sikorsky, and to United Technologies shareholders?
At a minimum, this 10-year production deal looks likely to add $350 million to Sikorsky's annual revenue streams, instantly transforming the UTC division from a $6.25 billion business into a $6.6 billion business.
Conceivably, it could do even more than that. As DefenseNews reports, the contract with Turkey contains "options" that could see Turkey sextuple the size of the deal over time -- from 109 helicopters to more than 600. If that happens, the deal's size could balloon to $20 billion or more.
At current operating profit margins, this could mean as much as $1.9 billion in pre-tax profits for Sikorsky and for United Technologies over the life of the deal. Alternatively, United Technologies may decide to monetize its subsidiary immediately. At the valuation of 1x sales common for pure-play defense contractors, victory in the Turkish contract means United Tech can probably expect to sell Sikorsky to an interested buyer for at least $350 million more today than it could have gotten before the contract was announced. That's a very nice potential profit for United Technologies.
Best of all -- United Technologies wouldn't have to go to the trouble of building a single helicopter to earn it.
Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.