Carlyle bets on strategic bidders in Arinc sale -sources

Thu Jul 11, 2013 9:15am EDT

* Honeywell, Lockheed, Rockwell Collins among bidders -sources

* Amadeus, Thales also involved in second-round bidding -sources

* Carlyle hopes to fetch as much as $1.5 bln from Arinc sale

* Private equity seen less likely to meet price expectations

By Soyoung Kim and Greg Roumeliotis

NEW YORK, July 11 (Reuters) - Carlyle Group LP is betting that industrial companies rather than buyout firms are more likely to meet its target price of up to $1.5 billion for the aerospace communications firm Arinc Inc, according to four people familiar with the matter.

Industrial conglomerate Honeywell International Inc and travel technology company Amadeus IT Holding SA are weighing offers in the second round of bidding for Arinc, the sources said, adding to the roster of companies participating in the auction previously reported by Reuters.

Lockheed Martin Corp, Rockwell Collins Inc and Thales SA, as well as a handful of private equity firms, also made it through to the second round, sources familiar with the matter told Reuters last month.

With fully-financed bids expected at the end of July, Arinc management is spending more time speaking with the aerospace and industrial companies and making more information available to them, rather than the private equity bidders, sources told Reuters this week.

Carlyle is hoping that industry players seeking to capture synergies with Arinc and expand their business lines may be willing to pay more than financial investors that will capitalize on Arinc only as a standalone investment, the sources said.

Private equity firms Blackstone Group LP, BC Partners Ltd, Warburg Pincus LLC, Hellman & Friedman LLC and Advent International Corp are through to the second round of bidding, sources told Reuters previously. Onex Corp is another buyout firm involved in the process, people familiar with the matter said this week.

The sources asked not to be identified because details of the auction are confidential. Carlyle and Honeywell declined to comment, while representatives for Arinc, Amadeus and Onex did not respond to requests for comment.

Annapolis, Maryland-based Arinc, founded in 1929, designs systems that help airline pilots communicate with the ground. It also provides transport communications and systems for the defense, government, healthcare, networks and security sectors.

STRATEGIC BUYERS

Carlyle's strategy of focusing on selling Arinc to industry players for a higher price tag is not without risk. It could result in private equity firms trying to lowball the auction should the strategic bidders decide to walk away.

Carlyle tried to sell Arinc in 2010 but failed to strike a deal. It did not want to sell cheap to another private equity firm, and rival aerospace companies expressed little interest in Arinc as a whole, partly due to concerns over its government consulting services, sources said at the time.

Many defense companies had long offered services that included advising government agencies on programs on which the companies ended up bidding, creating conflicts of interest. That prompted the U.S. Congress to pass a law requiring the Department of Defense to tighten rules on potential conflicts.

Arinc addressed this by selling its government consulting division to Booz Allen Hamilton Holding Corp, another Carlyle-backed company, for $154 million last year.

Private equity firms buy companies in order to sell them later at a profit. While they can exit their investments in other ways - through sales to other buyout firms or initial public offerings - finding an industry buyer willing to pay top dollar can be the most lucrative route.

Warburg Pincus, for example, stands to make close to three times its investment in eyecare company Bausch & Lomb Holdings Inc after reaching an agreement in May to sell it to Valeant Pharmaceuticals International for $8.7 billion.

In February, Carlyle co-Chief Executive William Conway lamented what he described as an absence of "aggressive acquirers of assets that we own" despite favorable financing conditions. But he was optimistic that buyers would eventually come forward.

"We have been stunned that the strategic players have not become more aggressive. Now we are beginning to see a little bit of activity in that regard," Conway said on an investor call.

Carlyle bought Arinc in 2007 from a group of U.S. airlines for an undisclosed sum. It believes it can fetch between $1.3 billion and $1.5 billion for it, people familiar with the matter have said.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article