By Shivam Bapu, Daniel Winsor, Pristie Sharma, Tim Li, and Mohammed Safayat (UCL), Joshua Ooi, Danissa Wan, Jack Wu, Samuel Atlass, and Ayushman Nath (Cambridge)
Photo: Artturi Jalli (Unsplash)
Overview of the deal
Acquirer: Parker Hannifin
Target: Meggitt
Total Transaction Size: £6.3bn
Closed date: Q3 2022
Target advisors: Morgan Stanley, Bank of America, Rothschild & Co
Meggitt is poised to become the latest British engineer to fall into foreign ownership after its shareholders overwhelmingly backed a £6.3bn takeover offer from a US rival.
The vote ends a turbulent few weeks for the FTSE 100 group, which had been the subject of a rival approach from TransDigm before the US aircraft parts maker pulled out earlier this month. Meggitt’s board, led by chair Sir Nigel Rudd, had recommended the 800p share offer from Parker Hannifin, which was 100p less than the preliminary approach by TransDigm. Shares soared by 60% in early trading following the announcement, with the move representing a 70% premium on the share value of the company at the end of trading on Friday, July 30, when it was at 469.1p per share.
The British government said it was taking an “active interest” in the deal, with Meggitt one of the few independent British aerospace suppliers whose customers include Airbus, BAE, and Boeing. Parker, which already has operations in the UK employing c.2,000 people, has committed to maintaining its UK headquarters in Coventry. The buyer will continue with the firm’s investment in UK R&D, with plans to increase investment by 20% over the next 5 years, whilst meeting Meggitt’s government contractual obligations with the DoD.
“We are confident the combination of Meggitt and Parker creates a world-class provider of engineered aerospace solutions enabling us to advance next-generation civil and military aerospace programs” - Tom Williams, chair and chief executive of Parker Hannifin
Company Details (Acquirer - Parker Hannifin)
Parker Hannifin is a motion and control technologies manufacturer which was founded in 1917 and has been traded publicly on the NYSE since 1964. The company creates precision-engineered solutions and is split into two segments: The Diversified Industrial Segment, which focuses on the production of motion-control and fluid power system components for a wide range of industrial users, and The Aerospace Systems Segment, which focuses on the production of mechanical systems and components within the aerospace industry. With almost 60,000 employees worldwide, it is one of the largest corporations of its kind.
Founded in 1917, headquartered in Cleveland, Ohio
CEO: Thomas L. Williams
Number of employees: 58,000
Market Cap: $38,128m (as of 02/11/2021)
EV: $43.94b
LTM Revenue: $14,347m
LTM EBITDA: $3,092m
LTM EV/Revenue: 3.06x
LTM EV/EBITDA: 14.2x
Company Details (Target - Meggitt)
Meggitt is a British international holding company that specializes in the design and manufacturing of components and subsystems within the aerospace and defense market. Despite officially being founded in 1947, the company’s roots trace back as far as 1850 through the business Negretti and Zambra - which invented the world’s first hot air balloon altimeter. Meggitt has 39 worldwide facilities with over 73,000 aircraft relying on their components every single day - a testament to the global reach and quality of the solutions and components that Meggitt provides.
Founded in 1947, headquartered in Ansty Park, Warwickshire, UK
CEO: Tony Wood
Number of employees: 10,200
Market Cap: $5.861B (as of 26/10/2021)
EV: $9.16B
LTM Revenue: $1.98B
LTM EBITDA: $136M
LTM EV/Revenue: x4.63
Projections and Assumptions
Short-term consequences
Parker expects $300 million worth of pre-tax synergies three years after the acquisition is complete, which will cost an accumulated $240 million (pre-tax) to generate. These will be achieved mainly by implementing The Win Strategy, which is Parker’s global strategic vision that outlines its operational priorities and the metrics it uses to determine various areas of performance such as customer experience and financials.
Synergies are also expected through supply chain improvements and increased efficiency. Both companies are within the aerospace sector with diverse portfolios of complementary products. This acquisition almost doubles Parker’s Aerospace Systems segment and creates a 500 bps increase in the proportion of its business that focuses on the aerospace aftermarket. Therefore, they can leverage the advantages of each company to increase both the operational and the functional productivity of the combined business. Moreover, the companies’ combined scale and overlapping geographical footprints will improve their competitive position, which is particularly important given the number of previous mergers in this sector, which have created giants in the market. By building on existing product lines, increasing R&D, and innovating to improve technologies, the combined company can improve its services, thereby increasing its competitiveness and hopefully also its market share.
Within the first year after closing, the combined company is expected to be earnings accretive and, in the fifth year post-completion, anticipates to deliver a high single-digit ROIC, which should continue growing in subsequent years.
Long-term Upsides
While initially seeming rather bleak for Meggitt, given a £7.1Bn (900p per share) offer was initially on the table from U.S. firm TransDigm, there are patriotically-centered virtues to instead being taken over by Parker-Hannifin for £6.3Bn. For example, Parker-Hannifin has promised to keep Meggitt’s UK headquarters in Coventry, and maintain the number of employees in product engineering, manufacturing, and R&D; Meggitt employs around 2,300 UK staff, contributing to 9,000 globally.
Also, expenditure on research and development is expected to be increased by 20%. Increasing this area could spell innovations that would drive demand, then revenues, and ultimately the profitability of Meggitt. As R&D remains an important component in the manufacturing and aerospace industry, the increased expenditure and growth in research will continuously ride on recent trends in the industry, such as customization and automation, to improve the design and manufacturing capabilities of the combined company. Long-term, this could add significant shareholder value – if Meggitt’s increased R&D budget brings such fruitful results.
The deal signals US investors’ continuous interest in the Aerospace market. Supported by the commercial aerospace recovery as Covid-19 restrictions are continuously being eased around the world, the share price of Meggitt jumped as much as 62% to an all-time high of 758 pence post announcement. In particular, Parker-Hannifin’s willingness to engage with the UK government to make several legally binding commitments, including to at least maintain R&D spending at the UK company for the next five years reassures investors that the company recognizes the importance that everybody has around national security and defense capabilities.
Risks and Uncertainties
al: (1) a potential UK government decision to block the transaction on national security grounds and (2) a failure to realize proposed synergies. Business Secretary Kwasi Kwarteng has already issued an “intervention” notice to review the impact of the takeover under the Enterprise Act 2002. The move will set off a series of government consultations about the impact of Meggitt’s foreign ownership on the provision of defence contracts – Meggitt supplies parts for jets including the F-35 – to the UK’s Ministry of Defence. With the UK Parliament recently passing the National Security and Investment Bill, companies now also have to notify the UK government of takeovers/mergers in 17 “mandatory sectors”, including defence, and subject transactions to further review. One fear is this increasingly interventionist attitude on the UK’s part may scupper the deal.
Furthermore, Parker-Hannifin’s expected $300M in cost synergies (through 2023) may not be realised if demand for new aircraft remains at depressed levels. Both Meggitt and Parker-Hannifin produce parts for a range of aircraft – ranging from military and unmanned aircraft to civil aircraft (Boeing 737s, 787s, Airbus A330s, A350s). With COVID-induced travel measures continuing to restrict international travel, aircraft deliveries might be at levels that are insufficiently high to realise these expected cost synergies.
Overall, the second risk factor is likelier to be of greater concern – the UK government is unlikely to block a transaction from a US-based defence manufacturer, given the strength of the security relationship between both countries. The whopping 71% premium offered by Parker Hannifin is also likely to sweeten the deal for shareholders who remain lukewarm to the deal’s longer-term synergies.
“We strongly believe Parker is the right home for Meggitt. Together, we can better serve our customers through innovation, accelerated R&D and a complementary portfolio of aerospace and defense technologies” - Tom Williams, Chairman and CEO of Parker Hannifin