Strategic Alternatives for the Respective Businesses
On 5/4/14, B/E Aerospace Inc. (Nasdaq-BEAV) unexpectedly announced that it is engaged in a process “to explore and evaluate strategic alternatives involving the company and its respective businesses to enhance shareholder value.” Unexpected means there were not the usually rumblings or rumor-mongering in the market prior to the announcement. In addition, BEAV cancelled an investor meeting that was scheduled to be held the following day in North Carolina. The company fundamentals are strong and business momentum is growing. BEAV 2014 revenues and EPS are expected to be up 18% and 24% (YoY basis), respectively and 1Q14 performance was solid. BEAV has three business segments: commercial aircraft (~51% revenues), consumables management (~37%) and business jets (~12%). Each segment has separate (and mostly leased) locations; corporate headquarters is located near Palm Beach, Florida. The commercial aircraft and business jet units are primarily manufacturing operations; consumable management is primarily a distribution business.
A sale of the entire company seems less likely given its business mix and large market capitalization (which limits the number of buyers). The market has been rewarding pure play companies; a spin-off and merger of the consumables business would retain the high growth commercial aircraft unit as well as the synergies with business jets. The aircraft-related businesses are a complimentary fit but the consumable segment, which provides material management logistical services to airlines as well as maintenance, repair and overhaul companies (“MROs”), is tangential to the core products (premium seats, food service equipment, oxygen delivery and modular lavatory seating). Since 2013, BEAV has been expanding its consumables business with acquisitions of companies that provide logistics services to the the oil-and-gas industry. Based on a $98.50 VWAP (last two tradin days), the BEAV 2014 valuation multiples are 2.9x EV/Revs ($4.11B, up 18% YoY), 13.6x EV/EBITDA ($877M, up 22% YoY, 21.3% margin) and 22.4x P/E ($4.40 EPS, up 24% YoY, 1.15x PEG of 19.6% LT growth rate). These valuations say “growth story,” not “value play and we believe that much of the potential upside from a strategic asset disposition is already reflected in the current BEAV trading price.
A news report stating that the company is in “early stage talks” and that it may request bids for “its two separate businesses” provides support for our contention that any deal is not imminent. One possible consideration for creating shareholder value would be combining two related businesses, such as the tax-free spin-off and merger of the flow control segment of Tyco Intl. Ltd. (NYSE-TYC) with Pentair, Inc. (NYSE-PNR) in 2012. TYC holders received ~52.5% S/O in P/F PNR. A similar transaction for BEAV would be merging its consumables business with an aerospace supply chain management services company like Wesco Aircaft Holdings, Inc. (NYSE-WAIR. At $21/share, WAIR has CY14 valuation multiples of 1.9x EV/Revs ($1.37B), 10.5x EV/EBITDA ($242M, 17.7% margin) and 14.5x P/E ($1.45 EPS). In 2013, the BEAV consumables segment reported $1.28B revenues and $270M EBITDA (~21% margin). We estimate $365M adjusted EBITDA for this segment in 2014E using 12% YoY revenue growth, a 19% operating margin, $35M D&A and $60M synergies; a 10.5x EBITDA multiple implies a $3.83B deal value. Consideration could consist of one share of the Newco ($2.23B value @ $21/share for ~52.5% of the combined entity) plus $1.6B of cash. We estimate Newco would have $1.56 P/F EPS (~8% accretion); a 15x P/E multiple implies a ~$23.50/share price. In this scenario, the combined entity would have 3.6x debt/EBITDA leverage compared to 2.4x debt leverage of standalone WAIR (which currently has a BB+ credit rating). We note the cash portion of the deal consideration may not be tax-free; BEAV has $1.96B debt which does not expire until 2020 (at minimum). Last, the BEAV oil-and-gas logistics and equipment supply acquisitions do not directly overlap with the aerospace services business of WAIR and may have to be divested or sold separately.
The above example points to the difficulty of finding the right partner and deal structure for a company exploring a sale in pieces rather than the whole. Assuming the financial loose ends of the spin-off and merger of the consumables segment could be resolved cleanly, the standalone value of the two BEAV aircraft-related businesses is next to be addressed. Assuming the cash proceeds are used to repurchase common stock (@ $100/share), we estimate BEAV would have ~89M S/O and P/F 2014E $3.00 EPS. A 25x P/E multiple implies a $75/share value for the remaining entity. The $98.50 combined value of the two pieces is slightly higher that the $97.98 closing price (5/6/14). Without the sale of the entire company, a spin-off of just the consumables segment would provide price support just at the current trading level. Our next best case scenario would be both the commercial aircraft and business jet segments being acquired subsequent to the spin-off. Assuming a 13x multiple of $700M adjusted EBITDA (including $125M synergies), $1.6B net debt and ~89M S/O, the implied takeover value would be $84/share. The combined $107.50/share value (from both transactions) would be a middling 26% premium to the BEAV prior 20 day average closing price of $85/share. Overall, we believe shareholders may be better off banking on BEAV having continued strong performance for the reminder of 2014 rather than expecting a neat-and-clean sale of the entire company near-term.