Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Rockwell Collins Inc. investors are probably stuck with the company's purchase of B/E Aerospace Inc. That's not such a bad thing.

The $8.3 billion takeover had been thrown in doubt after reports that activist investor Starboard Value was pushing Rockwell Collins to sell itself instead. But the window of opportunity for that is getting narrower by the day. On the company's first-quarter earnings call on Friday, Rockwell Collins CEO Kelly Ortberg said he had locked up U.S. regulatory approval for the B/E Aerospace deal and was moving full speed ahead toward a springtime closure. 

The lack of public bids isn't too surprising; many logical buyers have reasons to stay away. One potential suitor, General Electric Co., can be a wildcard when it comes to M&A, but CEO Jeff Immelt gave the impression last month that he was taking a breather after acquiring Alstom's power assets in 2015 and agreeing last year to merge GE's energy business with Baker Hughes Inc. Given some of the heat he's taken over the years for overpaying for takeovers, an expensive target like Rockwell Collins probably wouldn't go over so well anyway.  

Getting Warmer
Rockwell Collins has gotten more expensive relative to its projected Ebitda since announcing the B/E Aerospace deal. So have some of its potential buyers, but percentage-wise Rockwell Collins's gains have been more significant.
Source: Bloomberg

Rockwell Collins says shareholders will get to vote on the B/E Aerospace deal "in the very near future." They shouldn't reject it out of hand.  

Rockwell Collins's stock-and-cash bid is on the pricey side for aerospace transactions, I'll give the critics that. But the share portion was subject to a 7.5 percent collar and because Rockwell Collins is trading toward the upper end of the indicated range, it likely won't have to issue quite as much stock as investors might have feared. Expensive deals can also be worth it, if the logic plays out, and the strategy behind the B/E Aerospace deal just got an endorsement of sorts in Safran SA's takeover of the company's seating rival Zodiac Aerospace SA that was announced last week.

The creation of a French aerospace supplier giant has political benefits, but the companies also pointed to the incentive to add scale and the opportunity to better position themselves for the push toward a "more electrical aircraft." You say "smart," I say "more electrical."

Safran aims to get Zodiac back on track after years of profit warnings and delayed deliveries, creating a stronger competitor for B/E Aerospace. But this combination has been speculated since Safran made a failed approach for Zodiac back in 2010. For what it's worth, Rockwell Collins says it factored the possibility of that deal into its B/E Aerospace analysis. At the very least, not having to "fix" B/E Aerospace first will let Rockwell Collins start tackling new revenue opportunities in shorter order.

Sign of the Times
After years of booming demand, orders are slowing down at Boeing
Source: Boeing press releases

Buying B/E Aerospace will swing Rockwell Collins's sales mix toward the commercial aircraft market just as the demand boom of the past few years is winding down. It's an odd bet, especially considering optimism about the potential boon Donald Trump's pro-defense administration could provide to military-related orders.  

In the past, Ortberg has tried to sell investors on this dynamic by talking of the long-term expected growth in commercial air traffic, growing demand for plane retrofits and somewhat vague promises of how Rockwell Collins could sell its target's offerings to military customers. Last week, he got more concrete, giving examples of how Rockwell Collins had already used acquisitions to expand its government business and highlighting some B/E Aerospace products that could be sold to a broader government audience.  Investors may rightly be wary of these promised revenue synergies, which are notoriously more difficult to execute than straight cost cuts. (The potential sales benefits aren't part of the underlying business case of the deal, likely for that very reason.) But adding specifics at least demonstrates Ortberg has thought this through, and that should help him. 

Ready for Takeoff
Analysts' estimates for Rockwell Collins's fiscal year 2018 revenue have picked up after the company reported better-than-expected results for the first quarter of 2017
Source: Bloomberg

As far as the actual cost benefits go, Ortberg signaled that total savings may extend beyond the $160 million figure cited in the deal's October announcement. Whatever incremental costs the companies can cut likely aren't going to make or break how investors feel about this deal. On the other hand, little overlap does make the merger easier to tout in the press release Rockwell Collins may wind up writing some day in response to a Trump Twitter rant. We won't tell the president about that shift to low-cost country manufacturing that Ortberg touted as one driver of savings not too long ago. 

Ortberg's sales pitch to investors at least seems to be gaining traction. As of Monday morning, Rockwell Collins had made up for its drop the day of the deal's announcement, and then some. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. It was telling that Immelt constructed a partnership with Baker Hughes rather than buying the company outright at a high premium.

  2. B/E Aerospace already makes seating for helicopter programs under Airbus and Leonardo SpA and has provided oxygen systems for the Eurofighter and the Airbus A400M military transport aircraft, according to Ortberg. 

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net