Cessna and Beechcraft Get Together at Last

Beechcraft AT-6 Texan II. Still waiting for liftoff. Source: Wikimedia Commons

Fresh out of its bankruptcy¬†earlier this year, Hawker Beechcraft has found a home. On Friday, fellow planebuilder and defense contractor Textron (NYSE: TXT  ) announced that it is buying Beech Holdings, LLC, the parent of Beechcraft Corporation, for approximately $1.4 billion in cash. And if not quite a match made in Heaven, it's at least a match made in the heavens.

As described by Textron, Beechcraft today is "a leading manufacturer of business, special mission, light attack and trainer aircraft." Between sales of new aircraft and revenues collected from servicing and maintaining the 36,000 Beechcraft-, Hawker-, and King Air-brand planes in service around the globe, Beechcraft generated $1.8 billion in revenues this year. Thus, Textron is getting its rival for a very fair price of just 0.78 times sales -- a tidy discount to its own shares' 0.85 P/S ratio.

The deal makes sense from a business, as well as a financial, perspective. As Textron CEO Scott C. Donnelly explained, Beechcraft's "iconic King Air product line perfectly complements our Caravan and Citation jet line-up and our combined global service network will deliver the superior level of services expected by our Cessna, Beechcraft and Hawker customers." It will also help the combined plane maker give Gulfstream owner General Dynamics (NYSE: GD  ) a serious run for its money in the business jet market.

Meanwhile, the addition of Beechcraft's line of AT-6 light attack aircraft to Textron's own new creation, the Textron AirLand Scorpion, roughly doubles Textron's portfolio of budget combat aircraft. That's twice the chances Textron will have to win a contract with some military, somewhere, to begin making a go of this business.

Meanwhile, from Beechcraft's perspective, this deal will soften the blow, and mitigate the risk to its viability, suffered when Embraer (NYSE: ERJ  ) beat out the AT-6 for a lucrative contract to supply light attack aircraft to the Afghan military earlier this year.

Foolish final thought
If I've one reservation about the deal, it's this: To date, Beechcraft has not been particularly successful at winning contracts with the military, or generating profits from its business. At the same time, Textron will have to go deeply into hock to buy its new subsidiary. Management anticipates having to take out as much as $1.1 billion in new debt to finance its purchase. That will push Textron's debt load up past $4.4 billion -- nearly half its market cap -- and with little reserve cash to offset the debt.

That wouldn't worry me so much if Textron was currently generating positive free cash flow with which to pay down its debt. But it isn't. So it does.

Dividend lovers will hate this deal
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  • Report this Comment On December 28, 2013, at 1:22 PM, prginww wrote:

    I'm also concerned that since Textron is so very dependent upon their Bell Helicopter division for income from its defense contracts (V-22 Osprey, UH-1 Huey and AH-1 Cobra), and the DoD's budget woes, if they aren't maybe counting their chickens just a bit too early.

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