Rockwell Collins to Buy Carlyle’s Arinc for $1.39 Billion

Rockwell Collins Inc. Chief Executive Officer Kelly Ortberg landed Arinc Inc., the company’s biggest acquisition, after months of talks with owner Carlyle Group LP -- and just 11 days in the new job.

The $1.39 billion transaction announced yesterday is the largest U.S. aerospace and defense deal unveiled this year and will expand Rockwell Collins’s aerospace business outside the cockpit by combining its avionics and cabin technologies with Arinc’s communications networks.

Ortberg, 53, spearheaded the acquisition effort as he prepared to take over as CEO of Cedar Rapids, Iowa-based Rockwell Collins Aug. 1, replacing Clay Jones, who retired. The purchase gives Rockwell Collins a profitable company with a global customer base and an air-to-ground communications system that should give pilots a wealth of data as air traffic control systems are modernized, he said.

“Obviously this isn’t something that we cooked up overnight,” Ortberg said in a phone interview today. “We’ve been working on this deal for months. We long viewed Arinc as an attractive” addition to Rockwell Collins’s burgeoning information management portfolio.

Fourfold Return

Carlyle will earn a more than fourfold return on its $275 million equity investment in Arinc, which it purchased from American Airlines and other carriers in 2007, said a person familiar with the deal, who asked not to be identified because the terms are private. Christopher Ullman, a spokesman for Carlyle, didn’t immediately respond to a message seeking comment.

The transaction gives Rockwell Collins a cushion against future U.S. defense cuts since about 85 percent of Arinc’s revenue is derived from commercial customers, Ortberg said. The purchase will shift Rockwell Collins’s business mix to 54 percent commercial and 46 percent government.

Rockwell Collins’s current breakdown is 52 percent of sales from government contracts and 48 percent from the private sector, Cindy Dietz, a spokeswoman, said by e-mail. The company said it expects the transaction to close within 90 days.

“Arinc will provide a serious acceleration” back toward a business tilted toward commercial sales, Robert Stallard, a Royal Bank of Canada analyst, said in a note to clients. Stallard, who rates the shares as outperform, said transaction and integration costs probably will dilute earnings per share in the company’s next fiscal year.

Share Sales

Rockwell Collins fell 1.5 percent to $73.33 at the close in New York. Washington-based Carlyle slid 0.5 percent to $26.92.

For Carlyle, the world’s second-largest manager of alternative assets such as private equity and real estate, the sale adds to the disposal of shares in seven companies in the second quarter. Co-CEO Bill Conway said on an Aug. 7 conference call that the firm will invest less than the $7.9 billion it did last year, reversing an earlier prediction for an increase.

Before its sale to Carlyle, Arinc had been owned by airlines since its founding in 1929 to handle air-to-ground communications. The Annapolis, Maryland-based company once known as Aeronautical Radio Inc. now helps more than 14,000 commercial aircraft make more than 100,000 takeoffs and landings daily, according to its website.

Data Network

The company’s data tools, which are sold on a subscription basis, range from in-flight e-mail to the Aircraft Communications Addressing and Reporting System, which provides real-time weather and flight data to airborne pilots.

Under Carlyle’s management, Arinc has expanded globally a network that previously was centered on North America, said Robert Mann, who heads R.W. Mann & Co., a Port Washington, New York-based consultant. Rockwell Collins could further harness its data network to develop new in-flight entertainment products, a competitive segment, Mann said in a phone interview.

Arinc will have about $600 million in revenue this year, according to Rockwell Collins, which said last month that sales in its current fiscal year would be about $4.65 billion.

While Rockwell Collins’s 28 percent stock-price surge this year through Aug. 9 beat the 19 percent advance for the Standard & Poor’s 500 Index, that jump only left it in the middle of the pack compared with peers. The S&P Supercomposite Aerospace & Defense Index of 28 companies rose 31 percent in 2013.

Paris Air Show

Precision Castparts Corp.’s $600 million purchase of Permaswage SAS from Bridgepoint Advisers Ltd. was the year’s previous record acquisition in aerospace and defense announced in North America, according to data compiled by Bloomberg.

Ortberg joined Rockwell Collins in 1987 and had been president since September. He had previously led the Government Systems unit and helped oversee development of equipment for the Boeing Co. 787 while running the Commercial Systems division. Jones remains with the company as nonexecutive chairman.

In a June 19 interview at the Paris Air Show, Ortberg said the company would seek to win work on cockpit avionics as Boeing upgrades the 777, the planemaker’s biggest twin-engine model. Rockwell Collins displaced Honeywell International Inc. last year as Boeing’s supplier for cockpit displays on the 737 jet. The company also provides cockpit displays, pilot control systems and flight computer systems for the 787 Dreamliner.

Citigroup Inc. acted as Rockwell Collins’s financial adviser and also provided bridge financing for the Arinc transaction, Ortberg said. Evercore Partners Inc. and JPMorgan Chase & Co. acted as co-advisers to Arinc on the deal, according to Abernathy MacGregor, a public relations firm.

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