TransDigm Group (TDG 1.12%) is preparing a bid for British aerospace manufacturer Meggitt (MGGT), trying to break up Meggitt's planned sale to rival U.S. manufacturer Parker-Hannifin (PH 0.02%).

The approach has already ruffled some feathers in the United Kingdom, setting up a showdown between two Cleveland-based industrial giants for control of the British manufacturer of aerospace wheels and brakes.

Price won't be the sole consideration

TransDigm has submitted a preliminary, non-binding offer of 900 pence per share for Meggitt, a premium of 12.5% over Parker-Hannifin's 800-pence-per-share offer. Earlier this month, Meggitt agreed to be acquired by Parker-Hannifin in a deal worth about $8.7 billion.

Meggitt said it would evaluate any formal proposal, but said its board remains committed to Parker-Hannifin. The company said its board would weigh not just total price offered, but also "the potential impact across all its stakeholders including, but not limited to, Meggitt's employees, pension schemes and customers together with HM Government and other regulatory bodies."

A plane receiving maintenance in a hangar.

Image source: Getty Images.

TransDigm throughout its history has been an active acquirer, using mergers and acquisitions to generate a 600% stock return over the past decade, and appears set up well to win any bidding war based solely on price. The company has more than $2 billion in cash to put to work right now, and indicated earlier this year that it was looking to put that money to work on acquisitions instead of stock buybacks or dividends.

TransDigm bulls like to compare the company to a private equity firm because of its habit of streamlining acquired companies and then letting them run as autonomous units. But that sort of language also tends to conjure up images of layoffs and plant closures, and is likely to attract the attention of the British government.

Commercial aerospace flies through rough times

Parker-Hannifin, by comparison, has a much more conservative reputation. The company appears less likely to engage in a bidding war, though it does have a 50-year history and a solid reputation in the United Kingdom that could make it the preferred bidder even without topping a potential TransDigm offer.

The deal talk comes at a difficult time for aerospace companies, with airlines and commercial aviation businesses still reeling from the impact of the pandemic. All three of these companies count Boeing and Airbus among their largest customers, and all three have large businesses selling spare parts to airlines.

Meggitt generated about one-quarter of total 2020 revenue from aftermarket, or spare part, sales. That is also an area that TransDigm has emphasized over the year and is seen as one of the fastest growing parts of the aerospace market in the years to come as airlines retrench and lean heavily on older jets in the wake of the pandemic.

The original Parker-Hannifin deal offered Meggitt holders a 71% premium, however, there is arguably still room for a suitor to go higher. The Parker-Hannifin bid is priced at less than three times Meggitt's 2019 revenue, the last full year before the pandemic impact.

Investor takeaway

For now, shareholders in all three companies are waiting to see if TransDigm formalizes its bid. The U.K. takeover panel has given the company until Sept. 14 to make an offer, and TransDigm CEO Kevin Stein in comments to the British press has talked up the merits of a potential TransDigm proposal.

Meggitt shareholders are set to vote on the Parker-Hannifin offer on Sept. 21, but that date is subject to change depending on TransDigm's next move and how well it is received. The British government including business secretary Kwasi Kwarteng is "actively monitoring" the situation, according to reports, after receiving assurances from Parker-Hannifin that U.K. jobs and plants would be protected and sensitive military contracts would be preserved.

Chances are the U.K. government would be receptive to similar assurances from TransDigm. The company's last big deal was also in the United Kingdom, a $1 billion purchase of the radio and antenna business once owned by Cobham. TransDigm has pledged to triple investment in that business.

Meggitt is a solid franchise that would be a good fit with both TransDigm and Parker-Hannifin. But bidding wars carry the risk of overpaying. Based on what we know today there is no reason for investors in either Parker-Hannifin or TransDigm to hit the panic button, but the battle for Meggitt should be monitored closely to see what other twists might arise.