The Year's Biggest Aerospace And Defense Acquisition

Aug.12.13 | About: Rockwell Collins, (COL)

The year has been relatively quiet when it comes to large Aerospace & Defense acquisitions which is not necessarily a surprise. Although stocks of many firms are at historic highs and many of the larger firms are flush with cash, the likelihood of a major consolidation is not anticipated to take place as approval by the Department of Defense would see significant scrutiny. Additionally, the number of mid-tier suppliers in the defense sector that would attract a $1 billion plus valuation is relatively small. So many firms operating in the sector have turned to buybacks to deploy their cash. Firms such as Lockheed Martin, Northrop Grumman, and Raytheon are among those that have taken this path.

Which brings us to today's announcement that Rockwell Collins (NYSE:COL) will acquire privately-held Arinc from private equity firm Carlyle Group(NASDAQ:CG) for $1.39 billion.

The deal is the largest in the sector this year and combines Rockwell Collin's expertise in avionics and cabin technologies with Arinc's information and communications products that handle data for pilots, passengers, airports, and government regulators. The deal will add Arinc's sales of approximately $600 million to Rockwell Collins' $4.65B and shift its sales matrix from 52-48 government to 54-46 commercial.

Commercial aerospace is currently in the early stage of a multi-year aircraft replenishment cycle. Additionally, commercial aviation traffic is expected to double by 2030 and possibly even triple in the Asia-Pacific region according to the U.S. Air Force's chief scientist. Meanwhile the U.S. Federal Aviation Administration (NYSEARCA:FAA) has been undergoing a multi-year effort designed to increase the level of traffic they can handle.

For the firm, the deal is a natural fit and should add long-term value to Rockwell Collins.

Year-to-date (through August 9th), Rockwell Collins is up 27.9%, outperforming the S&P 500 by more than 7%; but underperforming the Powershares Aerospace & Defense ETF (NYSEARCA:PPA) which is up 32.28%.

YTD: COL vs. PPA vs. S&P500Click to enlarge

Arinc, founded in 1929 to handle air-to-ground communications for aircraft, was acquired by Carlyle in 2007. In 2012, Arinc sold its Defense Engineering and Support business to Booz Allen (NYSE:BAH) for an estimated $154 million, resolving a conflict and delaying a hoped-for sale in 2010.

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.

Additional disclosure: The author manages the SPADE Defense Index, the underlying index for the Poweshares Aerospace & Defense ETF (PPA)