On Thursday evening, industrial conglomerate and Cessna parent Textron (NYSE: TXT ) announced it has agreed to acquire all of Beech Holdings, the parent company of fellow aircraft maker Beechcraft, for roughly $1.4 billion.
Of course, the news isn't exactly a surprise. Last Friday, shares of Textron jumped more than 14% after the Financial Times reported that a deal was nearing completion. I took some time Sunday to explain the pop, making the argument for why Textron taking Beechcraft under its wing would be a great thing for shareholders.
After all, this week's acquiree sought bankruptcy protection in May 2012 after it was unable to endure an industry-wide decline in business jet sales. Then, after China-based Superior Aviation Beijing couldn't secure financing last year to fund a $1.79 billion acquisition, Beechcraft emerged from bankruptcy proceedings this February as a financially healthier company bearing a laser focus on building up its outperforming propeller-driven aircraft business.
And while Cessna is coming off its own weak quarter as the business jet market remains soft, Beechcraft's efforts in the propeller space are already bearing fruit.
Most notably, in addition to increasing third-quarter deliveries by nearly half over the same year-ago period, Beechcraft in August secured an order for up to 105 King Air 350i planes worth $788 million from membership-based private aviation specialist Wheels Up.The deal was the largest propeller aircraft order in history. In addition, Beechcraft was named the aircraft and comprehensive maintenance provider for Wheels Up in North America and Western Europe, bringing the deal's total value to roughly $1.4 billion.
Here's what's new
But now that the ink has dried on a formal agreement, what else do Textron investors need to know?
First, Textron is planning on funding its $1.4 billion cash purchase -- that's 78% of Beechcraft's 2013 sales, by the way -- through a combination of available cash and up to $1.1 billion in new debt. While taking on that much fresh debt undoubtedly comes with risks of its own, at least existing shareholders don't need to worry about Textron diluting their stakes through new equity offerings.
What's more, Textron should have no trouble getting Beech Holdings' investors to approve the deal. Specifically, holders representing equity interests in Beech sufficient to approve the transaction have already voiced their approval in the form of written proxies in favor of the acquisition. As a result, the purchase is expected to close during the first half of 2014.
Finally, and much to the relief of Beechcraft fans, Textron isn't planning on simply folding the brand into its Cessna canopy. To the contrary, Beechcraft CEO Bill Boisture chimed in to say that "Textron's experience in the industry and its willingness to invest in and maintain the iconic Beechcraft brand make it an ideal parent company, one that will help us continue to satisfy our customers and meet our business objectives at a faster pace."
But that also doesn't guarantee everything will stay the same, either. At a subsequent teleconference Friday morning, Textron Chairman and CEO Scott Donnelly provided a somber reminder that "from an employee's perspective, obviously we are going to need to go through restructuring and optimization of costs." At the same time, Donnelly insisted such changes would serve to strengthen Beechcraft's popular product offerings.
Textron spokesman Dave Sylvestre elaborated that, given the early stages of the acquisition, it's still too early to "speculate on what it means in terms of workforce size or plant consolidations."
In the end, though, this aviation industry consolidation appears to fall squarely in favor of Textron and its shareholders, so I have no problem maintaining my long-standing outperform CAPScall on the stock.
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Thanks to its most recent jump, Textron stock has risen 48% in 2013, handily beating the S&P 500 by nearly 20%. All the while, however, that left investors on the sidelines burned.
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