Textron combats jet slump with $1.4 billion buyout of Beechcraft
(c) 2013, Bloomberg News.
Textron, the manufacturer of Cessna aircraft, will boost its lineup of propeller-driven aircraft after reaching a deal to buy Beechcraft for $1.4 billion as it seeks to counter a slump in business-jet sales.
The Providence, R.I.-based company will purchase all outstanding equity interests in Beech Holdings LLC, the parent of Beechcraft, it said in a statement Thursday. The deal, which includes the repayment of Beechcraft's working capital debt, will be financed by a combination of available cash and as much as $1.1 billion in new debt.
Adding Beechcraft models such as the twin-engine King Air will complement a Cessna lineup that ranges from two-seaters to the Caravan turboprop used to fly people and cargo to small airports. That market segment is less competitive than private jets, where Cessna has struggled because it doesn't build the large, long-range planes now favored by corporate buyers.
"Terrific product fit," Cai von Rumohr, a Cowen & Co. analyst in Boston who rates Textron as outperform, said in a Dec. 23 note to clients. "Cessna and Beechcraft have complementary product lines, with Cessna focused on bizjets and Beech on turboprops, pistons."
Beechcraft had revived an auction process a year after its deal to sell itself to a Chinese jetmaker collapsed. It had drawn takeover interest from at least three suitors, including Brazil's Embraer SA, India's Mahindra & Mahindra Ltd. and Textron, Bloomberg News reported in October, citing people familiar with the matter.
The Financial Times reported Dec. 20 that Textron was close to a deal for Beechcraft. Squeezed by waning private-jet demand and a drop in U.S. arms spending, the former Hawker Beechcraft filed for bankruptcy in May 2012. The Wichita, Kansas-based company left court protection in February 2013 and exited the jet business.
Investors holding enough equity in Beech Holdings to approve the transaction have delivered proxies authorizing written consents in favor of the deal, Textron said. The transaction was unanimously approved by Beechcraft's board and the purchase is expected to close during the first half of next year, subject to customary closing conditions, including regulatory approvals, according to a statement by Beechcraft.
"This creates a broader selection of aircraft and a larger service footprint -- all sharing the same high standards of quality and innovation," Textron Chairman and CEO Scott C. Donnelly said in the company's statement.
The stock has gained 46 percent this year.
JPMorgan Chase & Co. served as exclusive financial adviser to Textron and is providing committed financing in connection with the acquisition. Beech Holdings was advised by Credit Suisse AG and Morgan Stanley. There is a termination fee of $48 million, according to Beechcraft's statement.
Beechcraft will bolster an aviation business that accounted for 60 percent of Textron's $12.2 billion in 2012 revenue. Products including the Commando four-wheeled armored vehicle and E-Z-Go golf carts make up the remainder of its sales.
The King Air division is Beechcraft's most valuable asset and biggest driver of its profits, according to Brian Foley, who heads Sparta, New Jersey-based consultant Brian Foley Associates. Other Beechcraft models include the single-engine Bonanza. Deliveries of all types totaled 204 in 2012, according to the company's website.
"The twin-engine turboprop would fit very nicely into their product portfolio without cannibalizing anything," Foley said in a Dec. 20 telephone interview.
Beechcraft is controlled by its former creditors. Centerbridge Partners LP, Sankaty Advisors LLC and Angelo, Gordon & Co. are among the funds that own a combined stake of about 90 percent and took control following the bankruptcy, according to the company. Before bankruptcy, Hawker Beechcraft was owned by Goldman Sachs Group Inc. and Onex Corp.
Negotiations to sell Hawker Beechcraft to Superior Aviation Beijing Co. ended in 2012 while the planemaker was reorganizing, partly because of questions about the Chinese company's financing, people familiar with the process said at the time.
Any deal involving Beechcraft's defense assets being sold to non-U.S. suitors would be subject to a review from the Committee on Foreign Investment in the U.S.
The planemaker started business in 1932, and it has supplied training aircraft for military pilots dating to World War II. Beechcraft said it saw a rebound in demand in 2013, and a Standard & Poor's report in April said King Air sales will help boost revenue and earnings "materially" through 2014.
Global aircraft shipments tracked by the General Aviation Manufacturers Association trade group also show signs of a rebound. Deliveries of multi-engine turboprops rose 42 percent in the first nine months of 2013 from a year earlier and single- engine turboprops were up 10 percent. Piston-engine planes rose 7.9 percent, while business jet shipments fell 2.1 percent.
The jet totals mask a changing marketplace that has hurt Cessna.
Shipments of planes with about 10 or more seats were headed to a gain of more than 10 percent in 2013 and to rise by less than 10 percent in 2014, according to Honeywell International Inc., which released its annual business-jet market forecast in October. Cessna's entry in that niche, the Longitude, is targeted to enter service in 2017.