B/E Aerospace (BEAV +0.00%) announced Tuesday morning that it would split itself into two independent companies, one focused on interior cabin products for commercial aircraft, the other focused on fasteners and logistics services. The stock was down as shareholders looking for short-term profits sold their stakes, leaving an opportunity for long-term investors.
Source: B/E Aerospace
Strategic review
B/E Aerospace announced a strategic review back on May 3. The stock was up 9.3% on the day, and 12% as of Monday night. Tuesday morning B/E Aerospace announced the split of the two businesses, which are currently being referred to as "Services Co." and "Manufacturing Co."
"Services Co. is the world's leading distributor and value-added service provider of aerospace fasteners, consumables and logistics services to the airline and aerospace industries," according to the company. For the 12 months before March 31, 2014, including the results from B/E Aerospace's recent acquisitions, "Services Co." had revenue of $1.6 billion and EBITDA excluding one-time items of $365 million.
"Manufacturing Co." is the aircraft cabin interior equipment business which is nearly double the size of the services business. For the 12 months before March 31 2014, "Manufacturing Co." had revenue of approximately $2.5 billion and EBITDA of $510 million.
The strategic review was likely heavily influenced by the activist Relational Investors, founded by Ralph Whitworth and David Batchelder. The $6 billion firm disclosed a 3.5% stake in B/E Aerospace in mid-May, which it began acquiring in February. Relational Investors started talks about separating its businesses with B/E Aerospace soon after.
Relational Investors has advocated for splits and or spin-offs before, most recently in late 2012 and throughout 2013 Relational made the case for Timken (TKR 3.12%) to separate its bearings and steel businesses. Relational partnered with CalSTRS to advocate for a split of the businesses because the firms believed that Timken was highly undervalued based on a sum-of-the-parts analysis. After a shareholder vote approved the split, the stock has risen from $42 to Relational's valuation of the company, $65. The spin-off of TimkenSteel is set for the end of this month.
After B/E Aerospace announced the review Relational's managing director of research commented, "B/E Aerospace has great core assets and a strong competitive position. We welcome the company's announcement to explore strategic alternatives and will encourage the board to evaluate and pursue opportunities, in a disciplined manner, that will maximize value for all shareholders."
Why B/E Aerospace was down
The company expects the split to happen in the first quarter of 2015. Investors who were looking for a quick sale of one of the businesses are thus selling out of their positions. Longer-term investors, however, could profit from the shortsightedness. Spin-offs have a history of creating value because they allow businesses to be valued more easily and allow managements to focus more on the individual businesses. Co-CEO Amin Khoury nearly said as much: "Separating these highly successful businesses into two industry-leading companies will allow each to benefit from increased management focus and operational flexibility."
Bottom line
Short-term investors are missing out on the value that a spin-off could provide. If the share price continues to fall, then long-term investors may be able to grab more shares at good prices.
