Boeing-KLX: Deal for Aerospace Parts Unit is Smart But Not Cheap

(Bloomberg) -- Boeing Co. is signaling it won't take on extra baggage in its pursuit of a bigger services division, but it will still have to pay up to build one.

The planemaker announced  early Tuesday that it would acquire KLX Inc. for $63 a share, or about $4.25 billion including debt. The catch is that Boeing is only buying KLX's aerospace business, which distributes parts and provides supply-chain services; it’s leaving the company's small energy unit to fend for itself. That disappointed KLX investors, who had pushed the shares to around $80 amid speculation of a Boeing bid for the whole company.

The actual takeover construct, which requires KLX to successfully spin off its oilfield services and rental-equipment business, is more complicated and less ideal for the target company. The energy unit had about $320 million of revenue last year and an adjusted operating loss of about $19 million. KLX, at the time still part of B/E Aerospace Inc., built the business through a series of acquisitions in 2013 and 2014, also known as the peak for oil prices. Much like General Electric Co. before the merger of its energy unit with Baker Hughes, KLX is stuck with a slipshod bundle of businesses that are now sub-scale in an industry that's been forced to get more rational with costs.

In theory, KLX investors aren't any worse off than they were before when it comes to the energy unit, and now they have the option to sell out of the exposure. But they would have preferred that Boeing pay them for it and do the heavy lifting. Not doing so makes loads of sense for Boeing, however.

With an eye toward seizing some of its suppliers' healthy margins, Boeing has set a goal of building a $50 billion aftermarket services business within the next decade, more than triple the revenue it had in that unit last year. It will need deals to reach that target, but Boeing doesn’t need an unprofitable energy-services business. That said, Boeing isn't exactly stealing the aerospace part of KLX.

The $63 a share Boeing is ascribing to the aerospace business exceeds the valuation implied by two sum-of-the-parts estimates released by analysts after KLX announced a review of strategic alternatives in December. The purchase price works out to almost 16 times the KLX aerospace division's 2017 Ebitda as caluclated by Boeing, a premium to the median for similar deals over the past five years. Berkshire Hathaway Inc., for example, paid about 13 times Ebitda when it acquired Precision Castparts Corp. in 2016, while Rockwell Collins Inc. paid about that for KLX's former parent company B/E Aerospace last year.

The latter deal, as well as United Technologies Corp.'s subsequent agreement to buy Rockwell Collins, in a way was in response to Boeing's push into the after market and the increasingly intense pressure it puts on suppliers to lower their costs. Those companies want to protect their turf, and in some cases, that will mean deals. All of this interest in aerospace consolidation is bound to filter down into the valuations of would-be targets.  

In the case of KLX, it's not clear if there was competing interest. M&A speculation has trailed the parts distributor ever since B/E Aerospace spun off the business in late 2014. It will be interesting to watch what happens to Woodward Inc., a $4.4 billion maker of cockpit controls that Boeing reportedly contemplated acquiring. Woodward is an even more complicated target than KLX, with an industrial division that makes controls for gas turbines and factory-automation tools, and a joint venture with GE for fuel systems. And it's not cheap.

Sharpen up those pencils.

  1. A merger with competitor Wesco Aircraft Holdings Inc. (valued at about billion) hadbeen bandied about as a possibility for KLX, but the companies had plenty of time to make that deal happen if they wanted to. Arguably, even combined, they may have struggled to compete as Boeing expanded its presence in aerospace distribution.

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