Spirit has attempted a number of ill-fated efforts to diversify away from Boeing in the years since its 2005 spinoff. Its latest effort, which showed great promise heading into 2020, appears to be unraveling during what is a chaotic time for commercial aerospace.
The ramifications would set Spirit's growth back for years, and could reverberate through the entire commercial aerospace supply chain.
Getting out from under Boeing's wing
Spirit is the one-time fuselage operation of Boeing, and the company still generates about three-quarters of its revenue from its former parent. Early in its history, the company tried to diversify its business by acquiring mostly low-margin castoffs from other suppliers, and it spent the better part of the last decade shedding those units and strengthening its core business.
In 2018, the company tried again at diversification, announcing plans to buy Airbus (OTC:EADSY) supplier Asco Industries for $650 million and then last year the aerostructures business of Bombardier (OTC:BDRAF) (OTC:BDRBF) for $1.09 billion. The Bombardier assets include a significant amount of Airbus business.
The push to diversify was driven in part by Boeing's 737 Max issues. Spirit makes the fuselage for the Max and has seen revenue plummet as the plane has remained grounded due to safety concerns. The COVID-19 pandemic, and its impact on airline profitability and demand for new planes, has further pressured results and caused Spirit shares to lose nearly 75% of their value year to date.
Although Airbus has the same pandemic-related pressures as Boeing, demand for its A320 and A200 planes have held up better than the 737.
It's a difficult time to do deals
Alas, it now seems unlikely those deals will close as planned. In a regulatory filing, Spirit said that as of Sept. 22 the conditions required to close the Asco deal, including approval from the European Commission, are unlikely to be met by the Oct. 1 termination date. Spirit said if the conditions are not met, "the Asco acquisition will automatically terminate."
The Bombardier deal is also shrouded in uncertainty. That deal would terminate on Oct. 31 if all conditions are not met, including a "material adverse change" clause related to Bombardier's business that arguably has been triggered due to the pandemic. Spirit could try to renegotiate the deal to get a better price, or it could see that purchase fall apart as well.
The terminations would be a mixed blessing for Spirit, denying the company its best chance in years to diversify but saving it nearly $1 billion in cash (the purchase prices included assumed debt and other non-cash obligations) at a time when it desperately needs to hold onto funds. Due to the pandemic and the 737 Max issues, Spirit is unlikely to turn cash flow positive until 2022 at the earliest.
Spirit is in a very difficult position
In the regulatory filing, Spirit also warned it expects its backlog of business to continue to decline due to the pandemic, and that it will likely take longer than expected for the company to book revenue from that backlog. Boeing has already reduced the number of 737 Max fuselages it intends to buy, and Spirit warned the 737 Max business could further deteriorate in the months to come.
The good news for Spirit investors is that 15 years after their separation, Boeing still needs its former subsidiary just as much as Spirit needs Boeing, and the aerospace giant is unlikely to let Spirit fail. Some industry watchers have even suggested Boeing could move to bring the unit back in-house to make sure its supply chain isn't disrupted and as a way to offer new job opportunities to its disgruntled unions.
A Boeing buyout seems like a longshot, but so too does a quick return to profitability. Spirit's best-case scenario would be to renegotiate both of its pending deals so it can dramatically lower the cash outlay but not lose the long-desired diversification.
As it is, Spirit AeroSystems' best-laid plans are unraveling. Bargain hunters be advised: This is a stock best left alone for now.