Investors in Textron (TXT) react with great enthusiasm to the announced acquisition of Beech Holdings, a deal which significantly adds to Textron's activities.
The deal makes excellent strategic and financial sense, and should be applauded by investors. Yet after the significant momentum in recent months, shares have become a bit too expensive to my taste to pick up at current levels.
Therefore, I remain on the sidelines.
Textron announced that it has agreed to acquire Beech Holdings, the parent company of Beechcraft Corporation in a $1.4 billion all-cash deal.
Beechcraft is a manufacturer of business, special mission, light attack and trainer aircraft. There are over 36,000 aircraft in service of the company. The company supports Hawker business jets, King Air turboprops and Beechcraft airplanes around the world.
The company employs some 5,400 worldwide in over 90 factories and service centers.
CEO and Chairman Scott C. Donnely commented on the deal, "The acquisition of Beechcraft is a tremendous opportunity to extend our general aviation business. From our customers' perspective, this creates a broader selection of aircraft and a larger service footprint, all sharing the same high standards of quality and innovation."
For the year of 2013, Beechcraft expects to generate annual revenues of $1.8 billion.
The deal is subject to normal closing conditions, including regulatory approval and is expected to close in the first half of 2014.
Back in October, Textron released its third quarter results. The company ended the quarter with $444 million in cash and equivalents. Total debt stands at $3.59 billion, including liabilities of the financing unit, for a net debt position of around $3.15 billion.
The deal will be financed with up to $1.1 billion in new debt for which the company has arranged a committed loan from JPMorgan (JPM).
Total revenues for the first nine months of the year came in at $8.60 billion, down 3.1% on the year before. Net earnings fell by a quarter to $331 million in the meantime. At this pace annual revenues could come in around $11.8 billion, as earnings could come in around $425 million.
Trading around $37 per share, the market values Textron at $10.4 billion. This values equity in the firm at 0.9 times annual revenues and 24-25 times GAAP earnings.
Textron pays a very modest quarterly dividend of $0.02 per share, for an annual dividend yield of 0.2%.
Some Historical Perspective
Long-term holders in Textron have seen very moderate returns. Throughout most of the past decade, shares steadily advanced to highs of $70 in 2007. Shares fell all the way to levels around $5 during the financial crisis two years later.
This year, shares have seen solid returns driven by momentum in recent months. Since the start of October, shares have risen more than 40%, increasing from $26 to $37 per share.
Between the calendar year of 2009 and 2012, Textron increased its annual revenues by a cumulative 16% to $12.2 billion. The company steadily improved the profitability, turning a modest loss in 2009 into a $589 million profit last year. Recently, the company has been repurchasing shares to fuel earnings per share growth even more.
The announced deal is significant for Textron adding roughly 15% in annual revenues. The valuation at 0.8 times annual revenues seems fair given that Textron's own business is valued at 0.9 times annual revenues.
Looking at the third quarter report, I see Textron generating EBITDA of nearly $820 million for the first nine months of the year, expected to come in around $1.1 billion for the year. This would value Textron's business at 9.5 times EBITDA.
Beechcraft generated $150 million in EBITDA, yet when including $65 million in synergies for 2014, the deal multiple comes down to 6.9 times EBITDA. Synergies in the years beyond are seen $10-$20 million higher, making the valuation even more appealing and resulting in earnings per share accretion in 2015.
With the announced acquisition, Textron, which is the manufacturer of the well-known Cessna aircraft, aims to counter a slump in business jet sales. With the deal, Textron gets a hold of King Air which is complementary to the Cessna line-up.
Cessna has been struggling this year, as the division does not built long-range planes which are used by corporations. Therefore, Cessna reported a segment loss of $81 million for the first nine months of the year, compared to a profit of $59 million in the comparable period last year. The Bell business, Textron Systems and industrial activities remained solidly profitable. While Cessna focuses on business jets, Beech is focused on pistons and turboprops providing some much needed diversification in the production of small planes.
This announced deal has already been rumored a week ago, after the company left bankruptcy court protection earlier this year. Investors are relieved with the deal given the great strategic rationale and financial benefits as well, which are seen achieved on the back of operational and marketing synergies.
The troubles at Cessna created quite a nice opportunity given the conglomerate discount resulting from the underperformance of the business. Still, shares have risen already 40% in less than three months, leaving little potential for the short to medium term in my opinion. For this reason I remain on the sidelines, but I applaud management and existing shareholders with a great deal.