Battle for Meggitt Shows Bigger-Is-Better Is Back in Aerospace

(Bloomberg Businessweek) -- Meggitt Plc, a U.K.-based aerospace and defense supplier, agreed earlier in August to sell itself to Parker-Hannifin Corp. for about $10 billion including the assumption of debt. The ink was barely dry on the press release before another aerospace company, TransDigm Group Inc., topped Parker-Hannifin’s bid by about $1 billion. Meggitt is reviewing the TransDigm offer, which the company must formalize by Sept. 14 under U.K. takeover rules if it wants to proceed.

Public bidding wars are rare in aerospace, and this one feels particularly aggressive at a time when the industry is recovering from the effects of the Covid-19 pandemic. Parker-Hannifin’s bid valued Meggitt at a premium to its pre-Covid high, and TransDigm’s proposal pushed the valuation even higher. Meggitt would represent the largest-ever takeover by far for either of its would-be acquirers, and each would have to take on a substantial amount of debt to see the deal through, potentially to the detriment of its credit ratings.

But if a pricey Meggitt buyout feels at odds with the current moment, it fits in perfectly with the longer-term trend in aerospace mergers and acquisitions. Pre-Covid, aerospace suppliers were focused on cobbling together ever-greater scale in an effort to stay competitive and boost their negotiating clout with plane makers Boeing Co. and Airbus SE. Bigger balance sheets also mean more money for research and development as manufacturers work to keep up with evolving technologies, especially when it comes to environmental advances. Companies announced almost $230 billion in aerospace takeovers from 2015 to the end of 2019, compared with $57 billion in the previous five years, according to data compiled by Bloomberg.

The bigger-is-better mantra will become relevant again sooner than it might seem. Orders for new Boeing jets have exceeded cancellations and conversions for six straight months as the plane maker digs out of a long slump prompted first by the almost two-year grounding of its 737 Max jet and then the pandemic. The company has discussed developing a plane that can be built more efficiently and meshes with engine makers’ efforts to lower carbon emissions. Airbus plans to ramp up production of its best-selling A320-series jets beyond pre-Covid levels by 2023 and introduce a hydrogen-powered plane by 2035.

It’s not clear that anyone will succeed in buying Meggitt. The U.K. has its guard up on takeovers involving domestic assets with links to national security. To help win the government’s support, Parker-Hannifin agreed to maintain Meggitt’s U.K. headquarters, boost R&D expenditures in the country, and keep its engineering and manufacturing head count at current levels. The enthusiasm with which Parker-Hannifin and TransDigm are pursuing the company suggests this won’t be the last midsize aerospace supplier to attract takeover attention.
 
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