Boeing on aftermarket acquisition prowl, sector advisors say
11 JUL 2017
On the heels of launching its new Global Services division, Boeing [NYSE:BA] is primed to make a sizable acquisition in the aftermarket services space, several sector advisors said.
AAR [NYSE:AIR], KLX [NASDAQ:KLXI], Warburg Pincus-backed Wencor Group and Wesco Aircraft Holdings’ [NYSE:WAIR] Haas Group International were identified as prospective targets for the aerospace giant by the sector advisors surveyed.
Last fall, Chicago-based Boeing announced plans to form the division and grow sales of the services business to USD 50bn within the next 10 years. The unit, which started operating on 1 July, encompasses the services businesses from Boeing’s government, space and commercial sectors.
Five of the sector advisors said for Boeing to meet this lofty goal, the company will likely need to make a major acquisition.
Speaking on the company’s 1Q17 earnings call in April, Boeing president and CEO Dennis Muilenburg said the company intends to hit the aggressive revenue target primarily through organic growth, although he acknowledged it would be complemented with inorganic growth. Boeing declined to comment.
Wood Dale, Illinois-based AAR is a mix of maintenance, repair and overhaul (MRO) services and supply chain support. The first sector advisor said Boeing needs to look to grow in both these areas.
AAR’s presence in logistics, distribution and MRO makes it one of the most logical acquisitions in the aftermarket space for Boeing, the second sector advisor said. The third sector advisor also noted AAR, which has a USD 1.2bn market capitalization, would add scale to Boeing’s presence in aftermarket services.
A Boeing/AAR deal is not a new idea. According to the fourth sector advisor, AAR has approached Boeing in the past to sound out a potential deal. It could not be learned if the talks progressed or if AAR has any current interest in a transaction.
Arguing against the logic of a deal, an additional sector advisor said AAR is heavily tilted toward MRO services, a business that has not been particularly attractive to companies like Boeing that manufacture airplanes. Another sector advisor highlighted that AAR is not a pureplay aftermarket services company.
If, however, Boeing wants to make an impact in the space, the first sector advisor said it would need to be fully embedded in both aftermarket and supply chain management. Another sector advisor acknowledged that “it’s hard to aftermarket without services.”
This week AAR announced that Michael D. Milligan was appointed CFO effective 1 September. The press release noted Milligan has significant finance and accounting expertise, as well as merger and acquisition experience, leading numerous transactions during his time at equipment rental company NES Rental. Earlier this year, United Rentals [NYSE:URI] acquired NES for USD 965m from its majority owner, Diamond Castle Holdings.
KLX, which was spun out of B/E Aerospace in 2014, may be less attractive to Boeing given its presence in oil & gas, said the second sector advisor. The company operates in two segments: Aerospace Solutions Group (ASG) and Energy Services Group (ESG). KLX’s ASG business generated USD 1.34bn in sales for the year ending 31 January 2017. The company’s ESG business posted USD 153.2m in revenue for the same time period.
Since being spun out, KLX has made several acquisitions, including Herndon Aerospace in 2016 for USD 210m, in addition to continuing to grow its oil & gas arm in spite of the industry fall off. ESG increased the number of its agreements with customers by over 115% from over 400 as of 31 January 2016 to over 900 as of 31 January 2017. KLX has a market capitalization of USD 2.7bn.
Wencor, which provides aircraft replacement parts and MRO services, has been struggling and may not be ripe for a deal despite a mature holding period, said three of the sector advisors. Warburg Pincus acquired the business from Odyssey Investment Partners for an undisclosed amount in 2014. The deal was reportedly valued at between USD 800m and USD 900m. Warburg lists its Wencor investment as being “late stage.”
In March 2016, Moody’s downgraded Wencor to Caa1 from B3. At the same time, the company’s senior secured rating was downgraded to B3 from B2 and the second lien term loan was downgraded to Caa3 from Caa2.
Haas Group, a provider of chemical supply chain management solutions to sectors such as commercial aerospace, could appeal to Boeing, said the second sector advisor, given its presence in distribution and logistics. Wesco Aircraft acquired Haas Group from The Jordan Company in 2014 for USD 550m.
At the Paris Air Show last month, Boeing released a forecast for aerospace services demand, projecting the need for expansive services over the next 10 years, valued at USD 2.6 trn.
The announcement veers from Boeing’s focus on developmental programs such as KC-46A Pegasus Tanker and 787 Dreamliner airliner. In January, the US Air Force awarded Boeing USD 2.1bn for 15 KC-46A tanker aircraft, spare engines and wing air refueling pod kits. Two months later, Boeing’s 787-10 Dreamliner completed its first flight.
With these programs launched, Boeing now has room to focus on aftermarket services, said one of the sector advisors. Boeing’s last major acquisition in aftermarket parts and services was in 2006 when it bought Aviall for close to USD 2bn.
Warburg Pincus and Wesco declined to comment. AAR, KLX and Wencor did not return requests for comment.