LMI Aerospace - Shareholders Overreact To Acquisition Of Valeant Aerostructures

| About: LMI Aerospace, (LMIA)

Shares of LMI Aerospace (NASDAQ:LMIA) lost almost 10% of their value over the past trading week. On Thursday, the engineering and aerospace company announced the acquisition of Valeant Aerostructures in a deal valuing the company at $246 million.

The Deal

LMI Aerospace announced that it will acquire Kansas City based Valeant Aerostructures for $237 million. The company will furthermore assume $9.7 million in certain obligations of the company.

Valeant is a leading provider of structural components and major sub-assemblies for key aerospace and defense companies. The company is a supplier of Boeing (NYSE:BA) as the company supplies for the 737, 747-8, 777, and 787 series. Valeant furthermore is a supplier for the Gulfstream G650. CEO Ronald S. Saks commented on the deal:

The acquisition of Valeant is transformational for LMI and represents a major step in fulfilling LMI's strategic objectives. Valeant provides additional capabilities, which should position LMI for long-term growth and success in what we believe will be a robust aerospace cycle. Another important benefit is this combination is increased content on key platforms. Spirit AeroSystems is Valeant's largest customer providing over 50% of Valeant's sales in 2012.

Combined, both companies could generate over $480 million of revenues in 2013, assuming the transaction would be closed in 2012. However, increased scale and complementary offerings should drive growth and result in significant synergies.

The deal values Valeant at 8.6 times 2013's projected EBITDA. The deal gives LMI $35 million in expected tax benefits, and leaves the possibility of $40 million in possible earn-outs, based on 2013 performance.

LMI has arranged a new $300 million senior credit facility with RBC Capital Markets in order to finance the deal. The deal is expected to result in slight dilution for 2013's earning per share, but is expected to be highly accretive to 2014's earnings per share.

The deal has already been approved by LMI's board of directors, but is subject to regulatory approval and normal closing conditions. LMI hopes to complete the deal by Dec. 31, 2012.


LMI Aerospace ended its third quarter with merely $0.1 million in cash and equivalents. The company operates with $2.4 million in short- and long-term debt, for a modest net debt position. This excludes the impact of the acquisition of Valeant.

For the first nine months of the year, LMI generated revenues of $206.7 million. The company net earned $15.5 million, or $1.31 per diluted share. At this rate, the company is on track to report annual revenues of $275 million, on which the company could earn $20-$21 million.

The market currently values LMI at $215 million. This values the firm at 0.8 times annual revenues and 10-11 times annual earnings. Again, this excludes the impact of the acquisition of Valeant.

Some Historical Perspective

Year to date, shares of LMI have gained some 5%. Shares started the year at $17 per share and rose to highs of $21 in February. Shares fell back to lows of $15 in June, and are currently exchanging hands around $18 per share.

Over a longer time period, shares of LMI rose from just $6 in 2009 to highs around $25 in 2011. From that point in time shares have fallen some 30%. Over the past few years, LMI consolidated annual revenues around $250 million, on which the company earned around $15 million per year.

Investment Thesis

LMI's deal with Valeant Aerostructures is a landmark deal for the company. The $246 million deal is greater than the company's own market capitalization of $215 million.

Assuming that LMI maintains its annual revenues at $275 million in 2013, this implies that Valeant could generates annual revenues of $205 million in 2013. As such, this would value the firm at 1.2 times annual revenues, which compares to a valuation of 0.8 times for LMI itself.

Unfortunately, LMI and Valeant did not specify annual synergy targets, but the fact that the deal will be "highly" accretive to 2014s earnings implies that annual synergies will be substantial. Recently, Boeing urged suppliers to consolidate in its effort to significantly step up production, given the record backlog in commercial airplane orders.

The deal seems rather favorable. The deal will significantly increase the company's debt position without resulting in too much dilution for LMI's shareholders. The company could need to deleverage, possibly by selling more shares. Despite the significant leverage, the deal looks quite appealing to me -- especially in the long term.

I will be looking forward to learning more about possible synergies in the company's next earnings report before deciding to pick up a few shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.