Whitworth Buys 3.5% Holding in B/E Aerospace Amid Review

Relational Investors LLC, the activist fund co-founded by Ralph Whitworth and David Batchelder, disclosed a stake of about 3.5 percent in B/E Aerospace Inc. as the maker of aircraft seats conducts a strategic review.

The firm started buying the shares in February and began talks with B/E management shortly therafter, according to a person familiar with the matter. San Diego-based Relational, which manages about $6 billion, disclosed the stake yesterday in a regulatory filing.

Relational supports B/E’s decision to evaluate options to improve capital allocation and maximize shareholder returns, and is considering whether to seek board seats before the June 4 nominating deadline, said the person, who asked not to be identified because the talks are private.

B/E’s review, disclosed May 4, surprised some investors because B/E had just said in April that it was working on two acquisitions of its own. In addition to seats, B/E supplies aircraft beverage makers, galley chillers, oxygen and lighting systems and aerospace fasteners. It also has made a foray into the oil and gas equipment-distribution business.

Greg Powell, a spokesman for B/E, didn’t respond to a voice message seeking comment. B/E, based in Wellington, Florida, said it hired Citigroup Inc. and Shearman & Sterling LLP to help it explore alternatives, including a sale of the whole company or separation of “selected businesses.”

‘Great’ Assets

“B/E Aerospace has great core assets and a strong competitive position,” Matthew Hepler, managing director of research at Relational, said yesterday in an e-mailed statement. “We welcome the company’s announcement to explore strategic alternatives and will encourage the board to evaluate and pursue opportunities, in a disciplined manner, that will maximize value for all shareholders.”

Amin Khoury, 75, co-founded the aerospace supplier with his brother Robert in 1987 and is chairman and co-chief executive officer, splitting his executive duties with operations chief Werner Lieberherr since the start of the year. The board has just six members, including the Khoury brothers.

The outcome of the review is “very much dependent on Mr. Khoury’s intentions,” Joseph Nadol, a New York-based aerospace analyst with JPMorgan Chase & Co., wrote in a May 13 research report. “As recently as two weeks ago, we would have thought those were to continue growing B/E Aerospace in its core aerospace market as well as in oil and gas rental equipment.”

Aviation Sales

B/E Aerospace’s aviation sales have boomed as planemakers Boeing Co. and Airbus Group NV compiled a record backlog of 10,130 orders, according to data compiled by Bloomberg Industries. First-quarter results were the best ever, Khoury told analysts on a call last month.

Relational also holds stakes in energy group Hess Corp., agricultural commodity processor Bunge Ltd., snacks supplier Mondelez International Inc., x-ray maker Hologic Inc. and air-conditioning manufacturer Ingersoll-Rand Plc, according to its most recent holdings disclosures. Third Point LLC, the hedge fund run by Daniel Loeb, exited its B/E holdings in the first quarter, according to a regulatory filing yesterday.

B/E has invested 6.7 percent of sales in the last decade in innovations ranging from the dimmable lighting for Boeing’s sculpted “Sky Interiors,” to compact lavatories and luxurious first-class seating, Howard Rubel, a New York-based aerospace analyst with Jefferies LLC, said in a May 5 report.

The supplier has been rewarded by gaining market share faster than its peers, Rubel said. B/E provides as much as $10 million in products on each new twin-aisle jetliner and as much as $1.5 million per narrow-body delivery, he said.

Consumables Unit

Rubel said there is an 85 percent probability that the entire company will be sold, and a 15 percent chance it would spin out a consumables unit that provides aircraft parts as well as oil and natural gas services. B/E Aerospace has acquired $515 million in energy-related businesses over the past nine months, Rubel said.

David Strauss, a New York-based aerospace analyst with UBS Securities LLC, predicted a sale or spinoff of the consumables management unit as the likeliest outcome in a report yesterday. The division is the second-largest of B/E’s three business segments, accounting for 36.8 percent of the company’s $3.48 billion revenue in 2013, according to data compiled by Bloomberg.

While a sale of the company could yield as much as $120 a share, “we see this as less likely,” Strauss said, downgrading the company to the equivalent of hold from buy. B/E dropped 1.6 percent yesterday to $96.41 at the close in New York, giving the company a market value of $10.1 billion.

Rubel rates B/E Aerospace a buy, while Nadol of JPMorgan downgraded it to the equivalent of a hold on May 13.

Timken, SPX

Founded in 1996, Relational buys stakes in companies it considers undervalued and then lobbies management and boards for changes to boost investor returns. In recent years the firm has targeted industrial companies including equipment manufacturer SPX Corp., bearings maker Timken Co., machinery builder Illinois Tool Works Inc. and hazardous waste disposer Clean Harbors Inc.

For the past year, Whitworth has served as interim chairman of Hewlett-Packard Co. after urging changes to turn around the largest personal-computer maker.

Activist investors tend to buy at least 5 percent of a company’s stock and flag their intention to actively engage executives and directors by disclosing their holding in a 13D filing with the U.S. Securities and Exchange Commission.

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