Aerospace Firms Woodward, Hexcel Merge; Responding to Boeing Troubles?

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Two firms that produce control systems and advanced composite materials agreed on Sunday to a merger of equals that will create one of the largest independent suppliers to the aerospace and defense sector. The agreement between Woodward Inc. (NYSE: WWD) and Hexcel Corp. (NYSE:  HXL) will create a single firm that generates more than $5 billion in revenues and free cash flow of around $1 billion last year.

This combination may reasonably be viewed as an attempt to gain scale as a supplier to Boeing Co. (NYSE: BA), as the aircraft maker continues to wrestle with the fallout from the grounding of its 737 Max passenger jet. Boeing has been notorious for squeezing its suppliers as it tries to reduce costs and keep growth and dividends high. Both Woodward and Hexcel get more than 10% of their annual revenues from sales to Boeing.

Hexcel shareholders will receive a fixed exchange ratio of 0.625 shares of Woodward common stock for each share of Hexcel common stock, and Woodward shareholders will continue to own the same number of shares of common stock in the combined company as they do immediately prior to the closing. Upon completion, existing Woodward shareholders will own approximately 55% and existing Hexcel shareholders will own about 45% of the combined company.

In connection with the transaction, Woodward is increasing its quarterly cash dividend from $0.1625 to $0.28 a share. The merger is expected to be tax-free for U.S. federal income tax purposes.

Once the deal is complete, Hexcel CEO Nick Stanage will become CEO of the combined company, to be called Woodward Hexcel, and Woodward CEO Tom Gendron will become executive chair. After one year, Gendron will retire and serve as non-executive chair. Stanage will become chair on the second anniversary of the merger. The board will consist of five current board members from each company, including Gendron and Stanage.

Woodward’s Gendron commented:

Our two companies are each independently working toward addressing the sustainability and efficiency needs of our customers. This merger accelerates our technology investments and creates greater benefits and growth opportunities than either company could have achieved alone.

Hexcel’s Stanage added:

Through our combined scale and strong cash flow profile, we will be even better positioned to accelerate innovation in aerodynamics and propulsion efficiencies and support evolving customer needs.

Just last week, Boeing’s fuselage supplier, Spirit AeroSystems Holdings Inc. (NYSE: SPR) announced that it would lay off about 2,800 employees at its Kansas plant as a result of Boeing’s decision to stop production of the 737 Max with no firm plan for when production may resume. More than 600 Boeing suppliers provide parts for the company’s airplanes. In addition to Spirit, the best known is probably General Electric Co. (NYSE: GE). GE’s aviation segment provides the Leap-1B engine for the 737 Max through a 50/50 joint venture, CFM International, with France’s Safran.

CFM also builds the Leap-1A engine for Airbus’s A320neo family of jets and has already announced that it plans to build more engines for Airbus than for Boeing in 2020. Smaller suppliers such as Woodward and Hexcel depend more heavily on sales to Boeing. In Woodward’s last fiscal year (ended September 2019), the company reported that 14% of its revenues were down to Boeing. In Hexcel’s most recent fiscal year (ended December 2018), the company reported that 25% of its sales came from Boeing, while 41% was down to Airbus.

Of Hexcel’s 2019 revenue totaling almost $2.2 billion, almost $900 million came from Airbus, while Boeing represented nearly $550 million. It’s a sure thing that 2019 revenues from Boeing will be lower.

At Woodward, $406 million of $2.9 billion in 2019 revenue came from Boeing. Nearly a fifth of the projected revenue from the combined company will come from Boeing and Airbus.

In Monday’s premarket session, Woodward stock traded up about 1.7% at $123.99, in a 52-week range of $74.38 to $124.78. The stock’s consensus 12-month price target was $125.14.

Hexcel stock traded up 6.5% at $77.65, in a 52-week range of $59.66 to $87.00 and with a consensus price target of $80.00.

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