TransDigm Drops Meggitt Chase, Clearing Path for Lower Offer

(Bloomberg) -- TransDigm Group Inc. dropped its pursuit of Meggitt Plc, clearing the way for Parker-Hannifin Corp. to move forward with its lower 6.3 billion-pound ($8.7 billion) buyout of the U.K. aerospace and defense supplier.

Meggitt shares sank as much as 14% on Tuesday after TransDigm said due diligence had indicated its tentative bid of 900 pence a share -- 100 pence more than offered by Parker-Hannifin -- wouldn’t meet “long-standing goals for value creation and investor returns.”

While either transaction could face regulatory scrutiny, Meggitt had indicated it considered Cleveland-based Parker the more attractive partner. Tom Williams, the U.S. firm’s chief executive officer, said last week he was “very open” to talking with the U.K. government and other stakeholders about commitments to keep jobs and manufacturing in Britain following its bid on Aug. 2.

“From a competitive standpoint it should clear the path for Parker’s takeover,” Bloomberg Intelligence analyst Douglas Rothacker said. “There are still regulatory hurdles to overcome but Parker seems willing to address those.”

Meggitt said Tuesday that it continues to unanimously recommend the Parker offer, which will be voted on by shareholders on Sept. 21. A Parker spokesman said the company is committed to progressing with its recommended offer.

Shares of Coventry, England-based Meggitt were trading 12% lower at 738.80 pence as of 3:24 p.m. in London. Parker rose 0.5% in New York, while TransDigm, also based in Cleveland, dropped 1%.

Scrutiny

TransDigm had until Sept. 14 to make a final decision on moving forward with a firm bid after arranging financing and securing an outline agreement with Meggitt’s pension fund.

The U.K. has increased its scrutiny of defense takeovers after a flurry of M&A in the sector, ordering a probe into the proposed purchase of Ultra Electronics Holdings Plc by private-equity owned Cobham Ltd. Business Secretary Kwasi Kwarteng has said he is monitoring the Meggitt situation.

What Bloomberg Intelligence says:

“This is what we had expected would happen: Parker prevails because it’s the more strategic buyer. Meggitt would be pivotal to Parker’s move toward long-cycle aerospace sales, increasing its exposure to 31% versus 19% at the expense of cyclical industrials.”

-- Karen Ubelhart, BI industrials analyst

Meggitt, which dates back 170 years, is one of the last independent U.K.-based defense suppliers, with customers including Boeing Co., Airbus SE and BAE Systems Plc.

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