Textron Inc. (TXT), the manufacturer of Cessna aircraft, will boost its lineup of propeller-driven aircraft after reaching a deal to buy Beechcraft Corp. for $1.4 billion, as it seeks to counter a slump in business-jet sales.
The Providence, Rhode Island-based company will purchase all outstanding equity interests in Beech Holdings LLC, the parent of Beechcraft, it said in a statement yesterday. The deal, which includes the repayment of Beechcraft’s working capital debt, will be financed by a combination of available cash and as much as $1.1 billion in new debt.
Adding Beechcraft models such as the twin-engine King Air will complement a Cessna lineup that ranges from two-seaters to the Caravan turboprop used to fly people and cargo to small airports. That market segment is less competitive than private jets, where Cessna has struggled because it doesn’t build the large, long-range planes now favored by corporate buyers.
“It’s definitely a pretty good overall fit,” said Eric Hugel, an analyst at S&P Capital IQ Inc. in New York, in a telephone interview today. “It looks like the deal is reasonably priced and there should be a lot of opportunity to squeeze out costs.” He rates Textron shares strong buy.
Beechcraft had revived an auction process a year after its deal to sell itself to a Chinese jetmaker collapsed. It had drawn takeover interest from at least three suitors, including Brazil’s Embraer SA (EMBR3), India’s Mahindra & Mahindra Ltd. (MM) and Textron, Bloomberg News reported in October, citing people familiar with the matter.
Squeezed by waning private-jet demand and a drop in U.S. arms spending, the former Hawker Beechcraft filed for bankruptcy in May 2012. The Wichita, Kansas-based company left court protection in February 2013 and exited the jet business with a pledge to keep servicing the planes.
“It’s an extremely good fit in terms of product as we add King Air,” Textron Chairman and Chief Executive Officer Scott C. Donnelly said in a conference call today with analysts. “It allows us to strengthen our service business.”
Textron shares gained 1.1 percent to $36.61 at the close in New York. The stock has risen 48 percent this year.
JPMorgan Chase & Co. (JPM) served as exclusive financial adviser to Textron and is providing committed financing in connection with the acquisition. Beech Holdings was advised by Credit Suisse AG and Morgan Stanley. (MS) There is a termination fee of $48 million, according to Beechcraft’s statement.
Textron expects eventually to wring out annual cost savings of $75 million to $85 million from the combined businesses. The deal will reduce next year’s earnings per share by about 35 cents because of transaction and accounting costs, Chief Financial Officer Frank Connor said on the call.
Commando, E-Z Go
Beechcraft will bolster an aviation business that accounted for 60 percent of Textron’s $12.2 billion in 2012 revenue. Products including the Commando four-wheeled armored vehicle and E-Z-Go golf carts make up the remainder of its sales.
The general aviation unit, led by the King Air brand, will account for 53 percent of Beechcraft’s estimated revenue of $1.8 billion this year. The service unit will account for 31 percent of revenue and defense, led by the T-6 military training aircraft, will make up 16 percent, Textron said. Beechcraft has 35,000 aircraft in service.
“The transaction will open many opportunities for Textron, particularly from the 35,000 customer relationships it will gain with the acquisition,” said Stephen Levenson, a Stifel Nicolaus & Co. analyst in New York who has a buy rating on the stock. “King Air and service are the real jewels.”
Textron will take over service for Hawker jets and hopes to convert those owners to Cessna jets, Donnelly said. The company is expecting low revenue from the T-6 military training plane as the U.S. military winds down it purchases and foreign sales of the plane would be a plus, he said.
Of the aircraft in service, 6,400 are King Airs and 2,250 are Hawker jets, said Julian Mitchell, an analyst with Credit Suisse Group AG, in a note today. The Beechcraft business is in good shape even with the bankruptcy and Textron isn’t expected to invest extra to fix it, Mitchell said.
“Much of the poor performance at Beech in recent years came in the discontinued jet business,” he said.
Beechcraft is controlled by its former creditors. Centerbridge Partners LP, Sankaty Advisors LLC and Angelo, Gordon & Co. are among the funds that own a combined stake of about 90 percent and took control following the bankruptcy, according to the company. Before bankruptcy, Hawker Beechcraft was owned by Goldman Sachs Group Inc. and Onex Corp. (OCX)
Beechcraft’s board and a majority of Beech Holdings voting equity approved the transaction, which should close in the first half of next year.
The planemaker started business in 1932, and it has supplied training aircraft for military pilots dating to World War II. Beechcraft said it saw a rebound in demand in 2013, and a Standard & Poor’s report in April said King Air sales will help boost revenue and earnings “materially” through 2014.
Global aircraft shipments tracked by the General Aviation Manufacturers Association trade group also show signs of a rebound. Deliveries of multi-engine turboprops rose 42 percent in the first nine months of 2013 from a year earlier and single-engine turboprops were up 10 percent. Piston-engine planes rose 7.9 percent, while business-jet shipments fell 2.1 percent.
The jet totals mask a changing marketplace that has hurt Cessna.
Shipments of planes with about 10 or more seats were headed to a gain of more than 10 percent in 2013 and an increase of less than 10 percent in 2014, according to Honeywell International Inc. (HON), which released its annual business-jet market forecast in October. Cessna’s entry in that niche, the Longitude, is targeted to enter service in 2017.
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