When Textron Inc. (NYSE:TXT), the world’s largest business jet maker through its Cessna unit reported a 19% drop in third quarter profit a couple of weeks ago, the company also announced plans to reduce the size of its finance unit, accelerate cost-cutting measures, and suspend share buybacks in an effort to boost its capital and liquidity position. This prompted some to start thinking that anything could be on the table, including a major asset sale.
Citigroup analyst Jeffrey Sprague told clients that if the company fails to unlock value and deliver acceptable results in its Cessna jet and Bell helicopter businesses, for example, Textron could become a takeover target.
With estimated sales of $6-billion, Cessna’s strength is in the light to mid-upper end of the business jet world. Bombardier Inc. (OTCQX:BDRAF) has business jet sales of around $5-billion and is strong at the upper end, according to Nick Morton at RBC Capital Markets.
While a combination of the two would be attractive, the analyst does not expect it will happen due to the challenges associated with financing a merger. “Textron has not ruled out any action that may be necessary,” he told clients of its de-leveraging efforts.
Mr. Morton looked at possible prices anyway, just in case. Onex Corp. (OTCPK:ONEXF) paid a 7.7 times EBITDA multiple for second-tier aircraft maker Hawker Beechcraft in 2007. Applying that to Cessna produces a value of roughly $8.8-billion.
As for Bombardier itself, the RBC analyst said the credit concerns that have punished aerospace stocks have also created opportunities. He considers the recent correction overdone and hiked his price target by a dollar to C$10 per share, which represents upside of roughly 125%.
Mr. Morton also noted that Bombardier sells its aircraft in U.S. dollars and has roughly $2-billion of costs in Canadian dollars for this division.
The analyst said:
It is now hedged about 12 months out at about par, which means that it will be some time until it reaps the benefit of a lower C$.
He added that with its transportation division using the Euro, that currency’s recent decline will have a big impact of the divisions reported revenues and profits.