What Rockwell Collins Gets by Acquiring B/E Aerospace

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The way to describe the October 24 trading day would be a “merger Monday.” Most people are focused on a huge media and telecom combination. Still, there is an aerospace merger that should have been noticed as well. Rockwell Collins Inc. (NYSE: COL) is acquiring B/E Aerospace Inc. (NASDAQ: BEAV) for a sum of $6.4 billion.

What investors will want to know here is that B/E Aerospace designs, manufactures, sells and services cabin interior products for commercial aircraft and business jets. Rockwell Collins is into communications and aviation systems through three segments: Commercial Systems, Government Systems and Information Management Services.

This involves what appears to be very low overlaps in the business, but it has enough reach and cross-sale potential. Another observation is that this deal is going to be semi-transformative for Rockwell Collins. After all, its own market capitalization is $10.3 billion. Rockwell Collins had $5.24 billion in sales in 2015, versus $2.73 billion for B/E Aerospace.

While B/E Aerospace’s shares did rise on the news, it is important to consider what Rockwell Collins will get here. First is that it can dominate what happens on the inside design of airplane cabins and the flight deck. The companies also laid out that they expect to generate run-rate pretax cost synergies of approximately $160 million. They also see this being double-digit accretive to Rockwell Collins earnings in the first full fiscal year, and they see combined five-year free cash flow generation in excess of $6 billion.

Because this has very limited overlap but adds new and expansive customers, Rockwell Collins sees the potential for revenue synergies that will create meaningful upside for its business.

Another issue to consider is that this is not an all-cash deal. That means that B/E Aerospace shareholders will have at least some price risk ahead. The $62 per share is being broken down as $34.10 per share in cash and $27.90 in shares of Rockwell Collins common stock — and that stock component is subject to a 7.5% collar.

Rockwell Collins and B/E Aerospace described the combined company as follows:

The transaction combines Rockwell Collins’ capabilities in flight deck avionics, cabin electronics, mission communications, simulation and training, and information management systems with B/E Aerospace’s range of cabin interior products, which include seating, food and beverage preparation and storage equipment, lighting and oxygen systems, and modular galley and lavatory systems for commercial airliners and business jets.

B/E Aerospace shares were up 15.4% at $58.40 on Monday, in a 52-week trading range of $36.38 to $58.85. The consensus analyst price target from Thomson Reuters was $56.21.

Rockwell Collins shares were last seen down 5.2% at $80.05. Its 52-week range is $76.03 to $95.11, and the consensus price target is $92.88.

It is not unusual to see the share price fall for an acquirer when a deal is announced. This is one of the deals that actually makes sense on the surface. Now investors will just have to see if Rockwell Collins shares can recapture some of this lost ground. If that occurs, then the reaction would be stronger than it first appears.