It's no $100 billion deal, but Rockwell Collins's purchase of airplane seatmaker B/E Aerospace is still transformative.
The avionics-equipment provider announced on Sunday that it's acquiring B/E Aerospace for $8.3 billion, including debt. The timing was a bit unusual considering the latter company was already slated to release its quarterly results on Monday. But perhaps the aerospace-systems suppliers just wanted their deal to be included in what will surely go down as one of the busiest weekends for M&A news, from AT&T's tiny $108.7 billion agreement to buy Time Warner to reports of TD Ameritrade and Toronto-Dominion Bank's (now confirmed) multi-billion-dollar interest in Scottrade Financial.
The B/E Aerospace deal is the largest Rockwell Collins has undertaken since it was spun off from the manufacturing conglomerate Rockwell International (now Rockwell Automation) in 2001. The transaction will add seats, kitchen galleys and lavatories to Rockwell Collins's lineup of information-management, navigation and in-flight entertainment technologies. That, in turn, will triple the value of Rockwell Collins's typical work-share on a wide-body jet and double what it can supply for narrow-body planes, CEO Kelly Ortberg told the Wall Street Journal over the weekend.
It could use the revenue boost. Sales were essentially flat in the year ended Sept. 30, according to results that the $10.3 billion company released ahead of schedule on Sunday. In fiscal 2017, Rockwell Collins expects its stand-alone business to bring in as much as $5.4 billion in revenue, implying a weaker pace of growth than analysts had anticipated.
Rockwell Collins has struggled as low commodity prices and slow economic growth weaken demand for business jets and as customers recycle more used parts rather than investing in new equipment. But it's betting the push to make airplanes smarter -- where even the seats and food carts are transmitting data that can be used to make flights more efficient and enjoyable for passengers -- will help break it out of that rut and drive demand for the kind of digitized products a combined Rockwell Collins-B/E Aerospace can offer.
This deal didn't come cheap, though. Rockwell Collins is offering B/E Aerospace holders $34.10 a share in cash and $27.90 in stock (subject to a 7.5 percent collar). The $62 bid is within a stone's throw of B/E Aerospace's highest trading price since spinning off its KLX services business in 2014. The offer works out to about 13.5 times B/E Aerospace's projected 2016 Ebitda, a premium to the median valuation paid in large aerospace and defense deals of the last decade and a few turns above B/E Aerospace's post-spinoff average.
But there's a blueprint for how to make expensive-looking aerospace-systems mergers work out well in the end: Just look at United Technologies' $18.4 billion purchase of Goodrich in 2012. Much like Rockwell Collins and B/E Aerospace, the companies didn't have much overlap, but they still achieved more synergies than originally targeted by negotiating better pricing with suppliers, moving production to lower-cost factories and consolidating back-office functions like IT services. That should give investors confidence in the $160 million of pretax cost savings that Rockwell Collins is targeting. Including those synergies, the transaction should be significantly accretive to the acquirer's earnings right away.
Of course, the underlying logic for the Goodrich takeover was to take advantage of soaring air traffic and the record order backlog at airplane manufacturers Boeing and Airbus. Five years later, Rockwell Collins and B/E Aerospace are responding to those companies' push for lower prices as they prepare for that same sales surge to start winding down.
Other suppliers facing those same pressures could seek to strike deals of their own. Analysts at Oddo & Cie now put 75 percent odds on airplane seatmaker Zodiac Aerospace getting a takeover offer. Earlier this year, Safran reportedly considered a bid for the aerospace supplier (read Gadfly's take on such a combination here). Honeywell has expressed an interest in airplane connectivity, particularly predictive-maintenance data analytics capabilities. That could put a company like Teledyne, which has a market value of about $3.7 billion, on its radar, Cowen analyst Gautam Khanna speculated earlier this year.
Even Rockwell Collins itself could be a target. The company has often been speculated as an attractive addition for United Technologies or General Electric. Arguably, the B/E Aerospace deal just made it more appealing, although its new larger size may spark more regulatory pushback.
Either way, this is one weekend deal trend that’s got legs.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Ironically, Rockwell Automation was also the subject of M&A speculation on Friday after a report from StreetInsider said Schneider was weighing a bid for the company. Analysts panned such a deal as unlikely, particularly considering that Rockwell Automation CEO Blake Moret has been in the top job for less than six months. Schneider denied the Rockwell rumors.
Honeywell is also a potential bidder for B/E Aerospace, but it will be challenging for rivals to justify topping Rockwell Collins's already rich offer. B/E Aerospace would have to pay a $200 million break-up fee if it walked away.
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