B/E Aerospace to Split in Two After Investor Push
B/E Aerospace Inc. (BEAV) fell the most in four months after announcing plans to split into two companies rather than auction assets in response to pressure from an activist shareholder.
The aerospace supplier will be divided into two independent, publicly traded entities, with their own management team and boards, with one focused on aircraft interiors and the other on distribution, logistics and technical services. B/E will continue to review further strategic options that could include sales of the units, Co-Chief Executive Officer Amin Khoury said on a conference call with analysts.
The restructuring is expected to be completed by early 2015, ruling out a speedy profit for investors looking to gain from activist fund Relational Investors LLC’s involvement with the Wellington, Florida-based manufacturer.
For investors hoping that B/E’s “exploration of strategic alternatives might lead to a quick sale of the company or its parts, today’s news is likely a disappointment,” Yair Reiner, a New York-based aerospace analyst with Oppenheimer & Co., said in a note to clients. The separation “likely pushes any liquidity event out of 2014,” while increasing costs.
The company’s shares declined 4.8 percent to $94.15 at the close in New York, their biggest plunge since Feb. 3.
B/E shares have lost much of the 11 percent gained through yesterday after the company said in May it was reviewing options that might lead to a sale or breakup. The shift in strategy, weeks after the firm said it was pursuing acquisitions, came after prodding to pursue opportunities to maximize shareholder returns by Relational, co-founded by Ralph Whitworth and David Batchelder.
“We do not expect a separation to unlock much value, at least in the near term, in part because we expect a lower valuation for the services business,” Joseph Nadol, senior analyst at JPMorgan Chase & Co. (JPM), wrote in a note to investors.
A sale of either unit isn’t likely soon, said Nadol, who rates the shares neutral.. “It appears as if there is not a more attractive offer for all or part of the company,” he said.
B/E’s 5.25 percent bonds maturing in April 2022, rose 3.1 cents to 109.5 cents on the dollar at 4:30 p.m. in New York, pushing their yield down to 2.62 percent, according to Trace, the bond-price reporting service of the Financial Industry Regulatory Authority.
Management will now be free to determine the optimal capital structure, cash allocation, growth strategy, pay levels and performance metrics for each business, B/E said. The two will be split in the first quarter of 2015 via a tax-free distribution to shareholders, it said.
The interiors-manufacturing arm had sales of $2.5 billion and earnings before interest, tax, depreciation and amortization of about $510 million, giving a 20 percent margin, the company said, citing 12-month numbers through March 31.
The business produces cabin fittings for both commercial airliners and business jets, offering a range of seats and entertainment features, galleys, lighting, storage equipment, emergency oxygen systems and lavatories.
The services arm had pro-forma sales of $1.6 billion and Ebitda of $365 million, equal to a margin of almost 23 percent. It includes the world’s largest array of fasteners and a business that assists oil and gas drillers.
“The split should make it easier to sell one or both businesses in a tax-free transaction,” Reiner said, “but also makes sense operationally, given the different organic growth trajectories and capital needs of the two businesses.” Reiner rates the shares outperform.
The company had already postponed an annual shareholder meeting scheduled for July 24, saying it was weighing strategic options. Relational, which disclosed a stake of 3.5 percent in B/E on May 15, had planned to nominate two directors to its board, people familiar with the matter said last week.
Founded in 1996, the firm buys stakes in businesses it considers undervalued and then lobbies for changes to boost investor returns. In recent years the firm has targeted companies including equipment manufacturer SPX Corp. (SPW), bearings maker Timken Co. (TKR), machinery builder Illinois Tool Works Inc. (ITW) and hazardous waste disposer Clean Harbors Inc.
French interiors specialists Zodiac Aerospace (ZC) and Safran SA (SAF) -- which also makes aircraft engines with General Electric Co. (GE) - - had been regarded as possible buyers for any cabin assets that B/E might make available for sale.
Citigroup is acting as B/E’s financial adviser, with Shearman & Sterling LLP as legal adviser.
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