Rockwell Collins is poised to significantly expand its airline and aftermarket reach with the proposed $8.3 billion deal to acquire cabin and cockpit systems maker B/E Aerospace. Under the agreement, announced yesterday, Rockwell Collins will acquire B/E Aerospace for roughly $6.4 billion in cash and stock and the assumption of $1.9 billion in debt. In turn, B/E shareholders will receive about a 20 percent share of the combined entity. The transaction is expected to close in the spring, subject to regulatory approvals.
Similar to its 2013 acquisition of Arinc, B/E would become a separate segment of Rockwell Collins and would continue to be run by B/E president and CEO Werner Lieberherr.
The merger of Rockwell Collins and B/E would create a company that employs nearly 30,000 workers, produces $8.1 billion in revenues and provides a spectrum of cabin and cockpit offerings—from avionics, cabin electronics, communications, information management systems and training to seating, food and beverage preparation and storage equipment, lighting, oxygen systems and galley and lavatory systems for both business jets and commercial airliners.
Rockwell Collins chairman, president and CEO Kelly Ortberg called the proposed sale “transformative and complementary,” saying the deal would “strengthen our position as a leading supplier of cockpit and cabin solutions, increasing our scale and establishing a new platform of growth for our company. The addition of B/E will also diversify and balance our portfolio across OEM, airline and aftermarket [clients].”
With 80 percent of its revenues derived from airline customers, B/E Aerospace will provide Rockwell Collins greater penetration in the airline market, Ortberg said. He believes B/E’s stronger airline relationships will open the possibility to sell more avionics. Likewise, where Rockwell Collins has the stronger relationship, the potential exists to sell more interior equipment. Ortberg estimated this could generate upwards of $50 million “per opportunity.”
Rockwell Collins already has seen such benefit through its Arinc acquisition, he said, noting that through Arinc, the company has been better able to understand the demands and needs of the airline customers.
“If you look at our content on next generation widebody aircraft, if we combine with B/E’s content, it will triple our position on…programs like the 787 and A350, which we know are going to drive the preponderance of the future of the widebody market, and it will nearly double our position in the narrowbodies.”
B/E has won nearly half of the business class and main cabin awards over the past two years and 85 percent of the galley insert awards, as well as provide oxygen for all in-production Airbus and Boeing platforms, as well as in-development programs.
In addition, Ortberg cited possibilities for the future-generation aircraft. “Our combined portfolio will uniquely position us to integrate cabin products, smart network technology, and connectivity solutions to significantly enhance aircraft uptime and airlines profitability,” he said.
Ortberg pointed to other areas of revenue generation as a result of the combined entity. A “prime area of focus” will be the business jet aftermarket. The merger could produce opportunities for new sales in aftermarket, representing anywhere between $200,000 to more than $1 million per aircraft in potential additional business, depending on the size of the aircraft. This could double the discretionary avionics modifications business. Ortberg said.
The B/E business base also could grow substantially, since Rockwell Collins has a network of almost 300 dealers. B/E does not have a dealer network, and as a result currently does not have as much exposure to when aircraft may come in for retrofits.
He further noted Rockwell Collins’s relationships both with the military and with OEMs, which could translate into additional business.
"We feel confident that this combination delivers significant long-term benefits neither company could realize on its own,” added B/E Aerospace founder and chairman Amin Khoury. “We look forward to becoming part of Rockwell Collins and leveraging their technology to accelerate our long-term growth as we embark on the next chapter in the company's history.”
Beyond the growth in business, the companies predict run-rate pre-tax cost synergies of about $160 million. They expect to see cost synergies from corporate consolidation, low-cost country manufacturing, supply chain, IT systems, and sales and customer support.
The acquisition is expected to result in double-digit accretion to earnings per share in the first full fiscal year and produce combined five-year free cash flow in excess of $6 billion, Rockwell Collins reported.