TransDigm Raises $780 Million Debt for Acquisition

 |  Includes: TDG, TFX
by: Zacks Investment Research

TransDigm Group Inc (NYSE:TDG) is raising senior subordinated debt of $780 million due in 2018, in a private arrangement exempt from registration requirements.

The company intends to utilize the loan amount, together with borrowings under a new credit facility, to finance the acquisition of McKechnie Aerospace Holdings, Inc., to repay a portion of debt under an existing credit facility, to inject cash into its balance sheet and pay transaction-related expenses.

The company has announced the acquisition of the actuation business of Telair International Inc., a subsidiary of Teleflex Incorporated (NYSE:TFX), for approximately $94 million.

The target manufactures precision engineered electro-mechanical products and other components for commercial and military aircraft.

The company has large and renowned customers in the aerospace/defense sector. These include: (1) distributors of aerospace components; (2) worldwide commercial airlines, including national and regional airlines; (3) large commercial transport and regional and business aircraft OEMs; (4) various armed forces of the United States and friendly foreign governments; (5) defense OEMs; (6) system suppliers; and (7) various other industrial customers.

The industry's stringent regulatory, certification and technical requirements, and large investments necessary for the development and certification of products, create barriers to entry for potential new competitors.

As long as customers receive products that meet or exceed expectations and performance standards, they will have little to no incentive to certify another supplier because of the cost and time of the technical design and testing certification process. In addition, concerns about safety and flight delays if products are unavailable or undependable are reasons for its customers to continue long-term supplier relationships.

TransDigm's business is sensitive to the number of flight hours of its customers' planes, the size and age of the worldwide aircraft fleet and customers’ profitability. These items are, in turn, affected by general economic conditions. Its business is directly affected by changes in revenue passenger miles (RPMs), the size and age of the worldwide aircraft fleet, and to a lesser extent on changes in the profitability of the commercial airline industry, among other factors.

RPMs and airline profitability have historically been correlated with the general economic environment, although national and international events also play a key role. As a result of the substantial reduction in airline traffic resulting from these events, the airline industry incurred, and some in the industry continue to incur, large losses and financial difficulties.

Some carriers have also idled or retired a portion of their fleets and have reduced workforces and flights. During periods of reduced airline profitability, some airlines may delay purchases of spare parts, preferring instead to deplete existing inventories.

TransDigm Group Inc is a leading global designer, producer and supplier of highly engineered aircraft components for use on nearly all commercial and military aircraft in service today. Its business is well diversified due to the broad range of products it offers to its customers. Goodrich Corporation (NYSE:GR) is a major competitor.

More than 95% of net sales for fiscal year 2009 were generated by proprietary products for which it owns the design. In addition, for fiscal year 2009, the company generated approximately 80% of its net sales from products for which it is the sole source provider.

We currently have a Neutral recommendation on TransDigm Group Inc.