B/E Aerospace Inc. (BEAV:US), the maker of seats for commercial and business jets, surged the most since 2011 after saying it hired financial and legal advisers to study options including a sale.
The strategic review disclosed yesterday surprised analysts after B/E said in April it was working on two acquisitions of its own. The announcement’s timing and cancellation of an investor meeting today suggests that B/E is already in advanced negotiations, said Yair Reiner, an Oppenheimer & Co. analyst.
“Were a deal not likely, we believe B/E Aerospace would have avoided making a disclosure that raises expectations and creates pressure on the company to act,” the New York-based Reiner said in a note today. He rates the stock as outperform.
B/E rose (BEAV:US) 9.3 percent to $97.22 at the close in New York, the biggest advance since August 2011. The Wellington, Florida-based company had a market value of $9.36 billion on May 2, and its 2.2 percent year-to-date (BEAV:US) gain then compared with a 2.4 percent advance for the Standard & Poor’s Supercomposite Aerospace & Defense Index.
Besides a sale of the company, Citigroup Inc. (C:US) and Shearman & Sterling LLP also will assess the possible divestiture or spinoff of some businesses, B/E said. No decision has been made and the board’s explorations may end with no deal, B/E said.
Reiner said a sale could fetch a “meaningful double-digit premium” over the current stock price. Robert Stallard, an RBC Capital Markets analyst in New York, said the stock could be worth as much as 26 percent more in a sale.
Chairman and Chief Executive Officer Amin Khoury told analysts on a call last month that B/E “signed important letters of intent to acquire two additional synergistic manufacturing businesses,” without identifying the targets. Khoury also said then that first-quarter results were the best in the company’s 27-year history.
“It’s unclear what changed since the April 23 conference call,” said Howard Rubel, an analyst at Jefferies LLC in New York who recommends buying the shares. “They seem to have gone in another direction; from the idea of buying to selling or finding another option to create value.”
B/E is “an attractive company, which has grown the business much faster than the market,” said Rubel, who declined to speculate on potential buyers in a note to clients today.
Greg Powell, B/E’s vice president of investor relations, didn’t immediately return a telephone message seeking comment today. The company didn’t respond to a call and e-mail sent yesterday.
A sale would attract more suitors if B/E splits the consumables businesses, which distributes fasteners and other goods to the aerospace industry, from its commercial aircraft and business jet units, which make airplane cabin products such as seats, Stallard said.
“We view distribution as a good, cash generative business, but it may not appeal” to suppliers that manufacture their own products, Stallard wrote.
Boeing Co. (BA:US) and Airbus Group NV may be interested in the distribution business, Stallard said. Wesco Aircraft Holdings Inc. (WAIR:US), a B/E competitor, “would seem like an obvious candidate for a combination.”
General Electric Co., Honeywell International Inc. (HON:US) and Safran SA may be interested in the cabin products business, Stallard said. Recaro Aircraft Seating GmbH, a closely held German aircraft-seat maker, is looking into the deal, Reiner said in his note today, and France’s Zodiac Aerospace is another main competitor.
“Consolidation is something we are looking into,” Recaro CEO Mark Hiller told reporters today in Frankfurt. “There will be more consolidation as new entrants are coming into the market.”
Besides aircraft seats, B/E makes cooking equipment and security devices. Boeing is its largest customer, according to data compiled by Bloomberg. B/E’s first-quarter net income jumped 21 percent to $109 million from a year earlier, while revenue rose 20 percent to $1.01 billion.
“Interiors are big and profitable these days, both for record new build numbers, extensive retrofits and a focus on premium passengers,” said Richard Aboulafia, an analyst at Fairfax, Virginia-based aerospace consultant Teal Group.
In the past five years, B/E has spent $1.6 billion on eight acquisitions, according to data compiled by Bloomberg.
A change of control at B/E would put Khoury in position to receive about $31.2 million, according to an April 30 filing that calculated the amount based on salary, stock options and benefits as of the end of 2013. Co-CEO Werner Lieberherr would get $12.1 million and Chief Financial Officer Tom McCaffrey would receive $10.3 million.
B/E would cover the taxes for Khoury and McCaffrey in case the payouts are subject to an “excess parachute payment,” according to the filing.
Khoury, Lieberherr and McCaffrey would “be automatically terminated” if ownership changes hands, according to the filing. A buyer would have the option of rehiring them for a minimum of one year and a maximum of two years, the filing shows.
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