B/E Aerospace's acquisition of Honeywell Aerospace's Consumable Solutions unit is intended to expand B/E's most profitable business dramatically and help the firm's continuing revenue growth while allowing Honeywell to concentrate on advanced aircraft technologies.
B/E will pay $1.05 billion for CS, comprising 6 million new shares of B/E stock and $800 million in cash, with any possible deficiency in stock value made up with more cash. It also gets a 30-year exclusive license to distribute Honeywell fasteners and other consumables to airlines and maintenance shops as well as a 20-year agreement to supply Honeywell facilities with just-in-time parts. Subject to normal antitrust approvals, the deal is expected to close in the third quarter.
CS distributes more than 140,000 parts (including fasteners, seals, electrical products and bearings) from 150 global manufacturers and 2,600 suppliers. Last year the company generated $524 million in revenue and it is expected to gross $582 million in 2008. These parts will be added to the 200,000 parts distributed by B/E.
B/E officials told investors on June 9 that the acquisition will enhance the firm's exposure to high-value markets, channels and regions while doubling its military market and its revenue in the Asia/Pacific and Middle East. They forecast that its part-distribution business thus will increase from $387 million in 2007 to $1.2 billion in 2009, about half of which will be in commercial aviation markets.
In addition, B/E expects immediate cost synergies of $30 million in 2009 and more than $84 million annually starting in 2011. The company will exploit its warehouse automation and IT assets, move from a broker to an inventory business model and rationalize redundant facilities. CS has four distribution facilities, 10 forward-stocking locations and 11 sales offices around the globe.
Scale and improved efficiency should move CS's operating margin toward the 29% level recently enjoyed by B/E's other distribution businesses, according to company execs. For evidence, they cite their 2006 acquisition of New York Fasteners, which tripled the new unit's operating margin in 18 months.
Overall, B/E doubled total revenue from 2005 to 2007, with an operating margin just short of 15% last year. First-quarter revenue rose 22% from the same period in 2007 and operating margin topped 16%. For distribution, operating profit was 22% of revenue in 2007 and 29% in the first three months of 2008. The firm expects double-digit revenue growth for the next three years and distribution to account for 43% of total revenue by 2009.
"It is a better fit for B/E since they focus on the distribution of commodities," summarizes Kevin Moriarty, CFO for Honeywell's air transport and regional business. "CS is a growing business but does not fit with our long-term plan to focus more on advanced technology for the entire aircraft."
CS sells to manufacturers of engines and auxiliary power units on many types of aircraft, to airlines and to shops. "It is a very sizable customer base," Moriarty observes. He says he does not expect its rapid recent growth will be dampened by current stresses in the airline business as the firm supplies both OEMs and aftermarkets.--Henry Canaday