Why Rockwell Collins is Acquiring B/E Aerospace

Michael Bruno, senior business editor of Aviation Week & Space Technology, analyzes Rockwell Collins' acquisition of B/E Aerospace.

Rockwell Collins’s offer to buy B/E Aerospace is a pricey ploy that will take more work to bring to fruition, but it could secure Rockwell as a leading provider of aircraft content while finding a successful exit for B/E.

On Oct. 23, the chief executives of both companies announced that avionics and aircraft connectivity provider Rockwell will buy cabin interiors leader B/E for $8.3 billion—$6.4 billion in stock and cash, as well as assuming $1.9 billion in B/E debt—in a move that would deepen Rockwell’s share of any given aircraft, as well as diversify its customer mix and geographic presence.

Why Buy B/E?

The move would triple Rockwell Collins’s widebody content

It would double Rockwell’s narrowbody content

Each company’s vulnerabilities would be buffered

It would catalyze Rockwell’s ability to offer connected parts

For B/E—which split into two companies in late 2014, leading Wall Street to anticipate even more strategic merger or acquisition moves—the sale brings a successful conclusion to founder and Chairman Amin Khoury’s legacy. Starting in 1987, he built an interiors provider with just $3 million in annual revenue to what is arguably the market leader, ringing in more than $2.7 billion in 2015.

“Obviously, it is no longer about me,” the 77-year-old Khoury said in a teleconference Oct. 24. “Our combination with Rockwell Collins represents an excellent outcome for B/E Aerospace’s stockholders, who will receive an immediate premium, as well as a substantial equity interest in a strong combined company, a broader range of products, customers and the combined expertise and resources to create real, meaningful future value.”

The companies offer complementary products. The proposal combines Cedar Rapids, Iowa-based Rockwell’s highly regarded avionics, cabin electronics, mission communications, simulation and training and information management systems with Wellington, Florida-headquartered B/E’s cabin interior products. Those include seating, food and beverage preparation and storage equipment, lighting and oxygen systems and modular galley and lavatory systems for commercial airliners and business jets (see graphic).

By way of technology, Rockwell’s offerings are “smart” while B/E’s are more inert. But as connectivity becomes increasingly important to the commercial and business aviation markets, with passengers, pilots, owners and maintainers all demanding more and better internet access and communications, Rockwell sees opportunities in making cabins smarter.

“Our combined portfolio uniquely positions us to integrate cabin products, smart network technologies and connectivity solutions to significantly enhance aircraft uptime and airline profitability while improving the experience of passengers and airline personnel,” Rockwell representatives say.

Rockwell—which has 20,000 employees and twice the sales of B/E—sees the acquisition as transformational for its business. The move represents a strategic decision to grow in adjacent, albeit familiar product markets instead of trying to break into unrelated fields. “We see tremendous opportunity to better serve our commercial aviation, business jet and military customers through broader offerings,” says Kelly Ortberg, Rockwell Collins chairman, president and CEO.

More important for Rockwell, adding B/E diversifies its customer mix, including airlines, and geographic presence, especially as worldwide commercial aircraft orders become more competitive in this mature business cycle and while the business aircraft sector continues to simmer or even cool down. In the new combined company, Rockwell’s widebody content on the Airbus A350 and Boeing 787 would triple, while narrowbody content would double, and  the company would be able to tap into more aftermarket revenue via higher refresh rates in interiors. In another metric, Rockwell’s overall business mix would shift to 55% commercial versus defense-oriented.

Financial analysts mostly agreed with Rockwell’s case about diversifying across customers and content, and many applauded the deal on the teleconference. But several also called the overall price tag expensive, and some questioned a seemingly low projection for aftertax boosts to annual revenue from the combination alone, or “synergies,” of just $125 million for what are otherwise multibillion-dollar companies.

“Considering that the commercial aerospace cycle is mature, the deal price is not cheap, and Rockwell’s balance sheet will be stretched postdeal, we expect Rockwell shareholders to receive this deal tepidly,” says Bank of America Merrill Lynch analyst Ron Epstein.

Stock traders have responded in kind, shaving about 6% off Rockwell’s share price in regular trading Oct. 24 while sending B/E up 16%.

The deal is slated to close by the spring of 2017, assuming shareholder approval and regulatory consent, which executives and analysts expect.  

Originally published in Aviation Week & Space Technology

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