by J. Kasper Oestergaard, European Correspondent, Forecast International.
On August 2, British aerospace and defense company Meggitt announced that it has accepted an offer to be acquired by Parker Hannifin, a U.S.-based manufacturer of motion and control technologies and systems headquartered in Cleveland.
Editor’s Note: A week after Parker Hannifin’s $8.8 billion announcement to acquire Meggitt, Transdigm has thrown its hat into the ring with a $9.74 billion offer.
Currently, Meggitt’s directors continue to recommend unanimously the offer by Parker to Meggitt shareholders and intend to include that recommendation in the Scheme Document expected to be sent to Meggitt shareholders in the coming week.
Meanwhile, Meggit will consider TransDigm’s potential offer.
The takeover of Meggitt is an example of corporate America’s desire for British companies, whose valuations are proving attractive due to the impact of the COVID-19 pandemic and Brexit.
The acquisition has been approved by Meggitt’s board and is subject to approval by shareholders. Parker Hannifin has offered 800 pence in cash per share or approximately $8.8 billion (GBP6.3 billion) in total. The offer is an almost 71 percent premium to the closing price of 469 pence per Meggitt share when markets closed on July 30, the last trading day before the acquisition announcement. When the acquisition closes, Meggitt will become part of Parker Hannifin’s Aerospace Systems division, which will in turn more than double in size.
Meggitt offers a broad product portfolio, with as much as 70 percent of revenue coming from sole-source contracts. The company operates through four principal business divisions as illustrated below: Airframe Systems, Engine Systems, Energy & Equipment, and Services & Support.
However, concerns are growing in the U.K. about the future ownership of companies in the aerospace and defense sector and what that means for the U.K. industrial base. Another concern is whether jobs will be retained. U.S. private equity firm Advent International acquired Cobham last year in a GBP4 billion deal, and now in June of this year, electronic warfare and sonar specialist Ultra Electronics became the target of a takeover bid from the now U.S.-owned Cobham. However, the GBP2.6 billion bid has run into trouble with the Conservative government, stating that it could intervene on national security grounds.
To alleviate industrial base and national security concerns, Parker Hannifin has agreed to a number of time-limited and legally binding contractual commitments to ensure that Meggitt retains a significant presence in the U.K. going forward. Among the commitments is a pledge to maintain the existing R&D, product engineering, and direct manufacturing labor headcount in the U.K. at no less than current levels, while increasing the number of apprenticeship opportunities. Also, Parker Hannifin will at least maintain Meggitt’s existing level of research and development spending in the U.K. and increase it by at least 20 percent over the next five years – subject to normal levels of aerospace industry activity and growth. Additionally, the majority of the board of directors must be U.K. nationals, Meggitt’s U.K. headquarters will be maintained, each of Meggitt’s existing divisions will operate under the new Parker-Meggitt name, and all four current divisions of Meggitt will remain in place. Also, Parker Hannifin will honor Meggitt’s obligations as a key supplier to the U.K. government along with other national security commitments. Finally, Parker Hannifin will keep Meggitt’s carbon emission reduction targets in place. The level of binding commitments sets the proposed acquisition of Meggitt apart from other recent deals. On top of that, Parker Hannifin has been doing business in the U.K. for over 50 years and today employs more than 2,100 people at 18 locations across the country.
Commenting on the acquisition announcement, Tony Wood, Chief Executive Officer of Meggitt, said, “Bringing together the Meggitt and Parker businesses will provide increased benefit to the U.K. with the provision of technologies, products, and capabilities through Meggitt, and a leading aerospace business in Parker. The offer from Parker is an endorsement of the work undertaken to transform the Meggitt Group in recent years, and the combined group will maximize the opportunities for future growth and profitability with a shared commitment to operational excellence, allowing us to continue to invest in our people, products, and services for customers worldwide for years to come.”
Tom Williams, Chairman and Chief Executive Officer of Parker Hannifin, also commented on the deal: “We are committed to being a responsible steward of Meggitt and are pleased our acquisition has the full support of Meggitt’s board. We fully understand these responsibilities and are making a number of strong commitments that reflect them.”
Parker Hannifin expects that it can achieve $300 million of pre-tax synergies from its acquisition of Meggitt.
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Based in Denmark, Joakim Kasper Oestergaard is Forecast International’s AeroWeb Webmaster and European Editor. In 2008, he came up with the idea for what would eventually evolve into AeroWeb. Mr. Oestergaard is an expert in aerospace & defense market intelligence, fuel efficiency in civil aviation, defense spending and defense programs. He has an affiliation with Terma Aerostructures A/S in Denmark – a leading manufacturer of composite and metal aerostructures for the F-35 Lightning II. Mr. Oestergaard has a Master’s Degree in Finance and International Business from the Aarhus School of Business – Aarhus University in Denmark.