Precision Castparts Acquisition Of Titanium Metals Makes Perfect Sense

| About: Precision Castparts (PCP)

Precision Castparts (PCP) announced on Friday that it will acquire Titanium Metals Corp (TIE) for $16.50 per share in cash. The transaction values Titanium at a total value of $2.9 billion and represents an almost 43% premium compared to Titanium's closing price of $11.57 per share on Friday. Shareholders in Precision Castparts applauded the deal as well, with shares trading up 4% in after hours trading.

The Deal

Precision Castparts announced that it will acquire Titanium Metals Corporation, the producer of titanium melted and mill products. Precision expects to achieve significant synergies by integrating the company and leverage each company's respective strengths.

As its largest customer, Precision Castparts is familiar with Titanium's operations and expects the integration to move ahead quickly once the merger is completed.

Chairman and CEO Mark Donegan commented on the deal, "Timet will provide us with the titanium capability that has always been a key missing piece of our overall production portfolio. As our 2006 acquisition of Specialty Metals did for us with nickel alloys, acquiring Timet will enable us to streamline our supply chain and better manage our input costs in our core operations. As we continue to grow in the aerostructure market, this supply linkage will present even more of an opportunity."

For the full year of 2011, Titanium Metals generated $1.05 billion in annual revenues. The company net earned $114 million for the year. Titanium Metals generated $816.2 million in sales for the first nine months of the year, on track to generate full year sales of $1.1 billion. Net earnings came in at $77.8 million, expected to come in around $105 million for the full year.

Titanium ended its third quarter with $20.6 million in cash and equivalents. The company operates with $105.3 million in short and long term debt, for a net debt position of $86.7 million.

The $2.9 billion deal values Titanium at roughly 2.6 times annual revenues and 27-28 times annual earnings.

The deal has been approved by the board of directors of Titanium, and the board recommends that shareholders tender their shares in the offer. Harold Simmons and affiliates which control Titanium, have agreed to tender 45% of Titanium's shares. The large 43% premium is needed to induce other shareholders to tender their shares as Titanium started the year around $16.50 per share.

Precision Castparts has secured a fully underwritten $3.0 billion bridge financing commitment to complete the acquisition. Precision Castparts expects the deal to be immediately accretive to earnings.


Precision Castparts ended its second quarter of its fiscal 2013 with $193 million in cash and equivalents. The company operates with $666 million in debt, for a net debt position of $473 million.

For the first six months of 2012, Precision Castparts reported revenues of $3.9 billion. The company net earned $675 million, or $4.61 per diluted share. At this rate, Precision is on track to generate annual revenues of $8 billion for its fiscal 2013, on which it could net earn $1.4 billion.

The market currently values Precision Castparts at $25 billion. This values the firm at roughly 3.1 times fiscal 2013s annual revenues and 18 times annual earnings.

Precision Castparts pays a negligible dividend of $0.03 per quarter, for a dividend yield of less than 0.1%.

Investment Thesis

Year to date, shares of Precision Castparts have risen some 4%. Shares have traded in a relative tight trading range between $150 and $180 per share, currently exchanging hands at $171 per share.

Over the past five years, shares have risen some 20%. Shares fell to lows of $50 during the crisis at the end of 2008 and the beginning of 2009, and have risen to all-time highs of $180 ever since. Between its fiscal 2009 and 2013, Precision Castparts expanded revenues from $6.8 billion to an estimated $8.0 billion this year. Net income rose from $1.05 billion to an estimated $1.40 billion.

The deal with Titanium makes sense for Precision Castparts as it is the largest customer of Titanium Metals. Titanium furthermore serves other customers including Boeing (BA), Rolls Royce and United Technologies' (UTX) Pratt & Whitney unit.

The deal values Titanium at 2.6 times annual revenues, compared to a multiple of 3.1 times for Precision Castparts itself. Precision pays 28 times annual earnings for Titanium compared to a multiple of 18 times for the company itself. The deal value is fair on the back of significant synergies to be expected by integrating both firms. The acquisition will add roughly 13% in annual revenues and 7% in annual earnings.

As such, significant synergies could be achieved, while they have not been specified. Precision Castparts has a good track record of making acquisitions and has made several deals earlier this year. Precision Castparts is following up on advice from the likes of Boeing and Airbus, which urged suppliers to consolidate.

The acquisition is an excellent addition for Precision Castparts which trades at fair value. Shares trade with gains of 4% in after hours trading, approaching $180 per share. The excellent deal could send shares to fresh all time highs in the coming weeks.

Long term holders could hold on to their 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.