B/E Aerospace’s Growth Warrants High Price Tag: Real M&A

B/E Aerospace Inc. bidders need to consider this: Is seizing the industry’s fastest growth worth the price?

Valued at 16 times profit yesterday, the maker of airplane seats already costs about 20 percent more than what United Technologies Corp. paid for landing-gear manufacturer Goodrich Corp. in the last major aerospace deal. As B/E studies options that may lead to a sale or breakup of the $10 billion company, analysts from firms including KeyCorp are predicting offers of up to $140 a share, or almost 22 times profit. That would make it the industry’s most expensive takeover on record, according to data compiled by Bloomberg.

The price tag would likely scare off private-equity firms, Oppenheimer Holdings Inc. said, leaving only aerospace companies with hefty cost-saving potential to make the numbers work. It may be worth the expense to gain a business that’s projected to post a fourth straight year of record net income, with big-ticket customers such as Boeing Co.

“Any acquirer would have to be a strategic one because the valuation of the company was already rich -- justifiably rich,” Yair Reiner, a New York-based analyst with Oppenheimer, said in a phone interview. “It’s a good company that’s facing strong growth prospects over the next several years.”

Safran Complement

Safran SA is among those that could afford B/E, which has a cabin business that would complement the French company’s equipment offerings, according to Royal Bank of Canada. While United Technologies isn’t ruling out more large deals after its 2012 purchase of Goodrich for about $16 billion in cash, it said on an April earnings call that acquisitions are difficult right now because targets have gotten expensive.

B/E’s strategic review disclosed May 4 surprised investors because the company had just said in April that it was working on two acquisitions of its own. In the statement announcing the move, B/E also canceled the investor meeting that was supposed to be held the next day.

Analysts and shareholders are now speculating that B/E’s decisions may have been prompted by an approach from an acquirer interested in purchasing all or parts of the company. Beyond seating, B/E supplies aircraft beverage makers, galley chillers and oxygen and lighting systems. The company also distributes aerospace fasteners.

Right Price

Greg Powell, a spokesman for Wellington, Florida-based B/E, didn’t respond to a phone message seeking comment.

“Once some potential buyers surface, all of a sudden people sharpen their pencils,” said George Young, a partner at St. Denis J. Villere & Co., which owns 1.86 million B/E shares. “It’s worth more broken up than all together. I see it very likely that some deal will come out. It’s just a question of negotiating to get the right price.”

For him, that price is $120 a share, a 41 percent premium to B/E’s average level in the 20 trading days leading up to its announcement.

“That’s the number at which I’d be happy to sell,” Young said in a phone interview from New Orleans.

B/E closed at a record $98.43 yesterday. That left it with an enterprise value of about $12 billion, equal to 16 times earnings before interest, taxes, depreciation and amortization. That’s the second-highest Ebitda multiple in its peer group, data compiled by Bloomberg show.

Today, B/E extended its gains, climbing 1.2 percent to $99.56.

Rich Valuation

The already expensive company could be valued at as much as $140 a share in a sale, Michael Ciarmoli, an analyst at KeyCorp’s KeyBanc Capital Markets, wrote in a May 5 report. At that price, an acquirer would be paying a record takeover multiple, according to data compiled by Bloomberg on aerospace and defense deals larger than $1 billion.

The valuation is already “a little rich, and it’s a $10 billion company, so their options are limited in terms of buyers,” said Scott Goginsky, a research analyst and money manager at Milford, Pennsylvania-based Biondo Investment Advisors LLC, which owns B/E stock among the $500 million it oversees. “It makes you wonder whether a breakup is more likely to be in the cards.”

Safran, a Paris-based company that makes aircraft engines, landing gear and cockpit controls, would be more interested in B/E’s cabin business, although it’s large enough to buy the whole company, said Rob Stallard, an analyst with RBC, in a May 6 report. Safran said in 2010 it had studied an acquisition of Zodiac Aerospace, B/E’s closest competitor for aircraft seats, and decided against making an offer.

United Technologies

United Technologies has said it may favor deals for its commercial-building unit, which makes Otis elevators and Carrier air conditioners. Still, the “heavy lifting” to integrate Goodrich after completing the takeover two years ago is mostly done, so it’s positioned to consider another large aerospace deal, Reiner of Oppenheimer said.

General Electric Co., which is seeking French government support of its offer to buy the power business of Alstom SA, can’t be ruled out, according to Stallard. While GE is mostly known for making large aircraft engines, it also owns other industry assets it gained from the 2007 purchase of Smith Aerospace, he said.

Precision Castparts Corp., which makes metal forgings for jet engines, “could make a pass,” though the “strategic logic is less clear,” Myles Walton, an analyst with Deutsche Bank AG, wrote in a May 5 report.

Multiple Suitors

Representatives for United Technologies, GE and Precision Castparts declined to comment on whether they’re interested in buying B/E or any of its businesses. A representative for Safran declined to immediately provide a comment.

“Ultimately, maybe there’s going to be multiple players who come to the table from the get-go,” Oppenheimer’s Reiner said. “Maybe that’s one of the reasons the press release was put out there in order to flush out potential bidders for various parts of the business.”

B/E’s growth may draw them in. Revenue may climb more than 50 percent by the end of 2017, topping the growth rate for every other aerospace or defense company valued at more than $5 billion, according to analysts’ estimates compiled by Bloomberg.

Airlines competing for passengers on lucrative long-haul routes are upgrading cabins with more comfortable seating and other amenities, Goginsky of Biondo Investment said. B/E said last month that its customer backlog was $8.9 billion.

“Aerospace has been in a big bull market, particularly the backlog for wide-body aircraft that use more and more expensive seats,” Mark Dawson, chief investment officer at Rainier Investment Management LLC, a Seattle-based fund that oversees about $11 billion, said in a phone interview. B/E is “an extremely well-positioned company.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE