Why 2 aerospace giants will go to war over this British gem

TransDigm Group (NYSE: TDG) prepares a bid for the British aerospace manufacturer Meggitt (LSE: MGGT), trying to break up the planned sale of Meggitt to a rival US manufacturer Parker-Hannifin (NYSE: PH).

The approach has already ruffled some feathers in the UK, setting up a standoff between two Cleveland-based industrial giants over control of the UK aerospace wheel and brake maker.

Price won’t be the only consideration

TransDigm has submitted a preliminary, non-binding offer of 900 pence per share for Meggitt, a premium of 12.5% ​​over Parker-Hannifin’s offer of 800 pence per share. Earlier this month, Meggitt agreed to be bought out by Parker-Hannifin in a deal worth around $ 8.7 billion.

Meggitt said he would assess any formal proposal, but said his board remains committed to Parker-Hannifin. The company said its board would assess not only the total price offered, but also “the potential impact on all of its stakeholders, including, but not limited to, employees, pension plans and employees. clients of Meggitt, as well as Her Majesty’s Government and other regulatory agencies “.

Image source: Getty Images.

Throughout its history, TransDigm has been an active buyer, using mergers and acquisitions to generate a 600% market return for the past decade, and appears well positioned to win any bidding wars based solely on price. . The company currently has more than $ 2 billion in cash to use and indicated earlier this year that it is looking to use that money for acquisitions rather than share buybacks or dividends.

TransDigm Bulls like to compare the company to a private equity firm due to its habit of streamlining acquired companies and then letting them operate as stand-alone units. But this kind of language also tends to conjure up images of layoffs and plant closures, and is likely to attract the attention of the UK government.

Commercial aerospace is going through tough times

Parker-Hannifin, by comparison, has a much more conservative reputation. The company appears less likely to engage in a bidding war, despite having a 50-year history and a solid reputation in the UK that could make it the preferred bidder even without exceeding a potential bid from TransDigm.

Discussions over the deal come at a difficult time for aerospace companies, airlines and commercial aviation companies still reeling from the impact of the pandemic. These three companies count Boeing and Airbus among their biggest customers, and all three have large companies selling spare parts to airlines.

Meggitt generated around a quarter of total 2020 revenue from sales of spare parts or spare parts. This is also an area that TransDigm has focused on during the year and is considered to be one of the fastest growing aerospace market segments in the years to come, as the Airlines are retreating and relying heavily on older jets in the wake of the pandemic.

The original Parker-Hannifin deal offered Meggitt holders a 71% bounty, however, there is arguably still room for a suitor to go higher. Parker-Hannifin’s offer is valued at less than three times Meggitt’s revenue in 2019, the last full year before the impact of the pandemic.

Takeaway for investors

For now, the shareholders of the three companies are waiting to see if TransDigm formalizes its offer. The UK takeover panel has given the company until September 14 to make an offer, and TransDigm CEO Kevin Stein in comments to the UK press has spoken of the merits of a potential TransDigm proposal. .

Meggitt shareholders are expected to vote on the Parker-Hannifin offer on September 21, but that date is subject to change depending on TransDigm’s next move and reception. The UK government, including Business Secretary Kwasi Kwarteng, is “actively monitoring” the situation, according to reports, after receiving assurances from Parker-Hannifin that UK jobs and factories would be protected and sensitive military contracts would be protected. preserved.

The UK government is likely to be receptive to similar assurances from TransDigm. The company’s latest big deal also took place in the UK, a billion dollar purchase of the radio and antenna business once owned by Cobham. TransDigm is committed to tripling its investments in this company.

Meggitt is a solid franchise that would suit both TransDigm and Parker-Hannifin. But bidding wars carry the risk of overpaying. Based on what we know today, Parker-Hannifin or TransDigm investors have no reason to press the panic button, but the battle for Meggitt needs to be watched closely to see what other twists and turns could arise.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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