Recaro eyes assets as B/E Aerospace explores sale

FRANKFURT/PARIS Mon May 5, 2014 1:51pm EDT

FRANKFURT/PARIS (Reuters) - German aircraft seating maker Recaro is looking at buying assets from B/E Aerospace (BEAV.O) after the U.S. company announced a surprise review that could lead to a shakeup of the $3 billion cabins industry.

Florida-based B/E Aerospace on Sunday postponed Monday's investor meeting and said it has hired Citigroup Inc (C.N) advisers to explore options, including a possible sale, merger or spinoff of the company or selected businesses.

The statement came less than two weeks after the company reported a record quarter for new orders amid rising demand for wide-bodied jets, and said it was looking at two potential aerospace acquisitions and had completed a third.

Analysts said the review could lead to a break-up of the 26-year-old company, which has grown through more than two dozen acquisitions to become one of the largest makers of aircraft seats, with a leading role in the parts distribution chain.

Asked in Frankfurt whether Recaro Aircraft Seating was interested in buying any assets from B/E Aerospace, Chief Executive Mark Hiller told reporters: "We are looking into it".

B/E shares jumped around 10 percent in early U.S. trading on Monday to $97.99.

In Paris, B/E's closest rival in the seats market, Zodiac Aerospace (ZODC.PA), declined to comment. Its shares were down 1.2 percent, slightly lagging a weaker overall market .SBF120.

"Zodiac cannot be considered a potential bidder on the deal in our view," said Kepler Cheuvreux analyst Christophe Menard.

Given B/E Aerospace's $9 billion market value, "an acquisition in full of the company could only be carried out by a much larger player in aerospace," he said in a note.

But several of the large companies that could bid for all or part of B/E Aerospace appeared already occupied with other acquisition strategies.

General Electric Co (GE.N) said last week that its $13.5 billion offer for the power business of France's Alstom (ALSO.PA) would effectively fill its allotment for acquisitions through next year, while the company's aviation division is focused predominantly on manufacturing jet engines.

At United Technologies Corp (UTX.N) analysts have said recently that the diversified manufacturer is more likely to focus on deals to boost its commercial building businesses, which sell elevators and climate control systems, than on aerospace.

On United Technologies' earnings call last month, Chief Financial Officer Greg Hayes said the idea of striking a big deal this year was very unlikely.

Honeywell International Inc (HON.N) said in March that it was planning for $10 billion in deals through 2018 as part of its five-year financial plan. That deal value would more than double what Honeywell spent in the previous five years on acquisitions, but the spending was expected to be spread across the whole company, not just the aerospace division, which works primarily on electrical and mechanical systems.

Avionics maker Rockwell Collins took on significant debt recently to buy Arinc, whose computer networks help flight crew navigation. That may limit its ability to do a big deal.

Spokesmen for GE, United Technologies, Honeywell and Rockwell declined to comment.

A bid from within the industry for the seats business would have to overcome competition hurdles, with Zodiac and B/E controlling around 70 percent of the market between them.

Buying assets from B/E Aerospace could help Recaro, a family run firm, to expand in the lucrative market for premium seating. Recaro says it is the market leader for economy seats, but wants to expand its grip on profitable premium seats.

On Monday, the unlisted German company reported sales of 337 million euros for 2013 and said it was aiming to reach 600 million in 2018, not including the effects of any acquisitions.

BREAK-UP TALK

B/E Aerospace makes lavatories for the Boeing 737 and galleys for the Airbus (AIR.PA) A350, as well as seats and oxygen units. It also has a spare parts distribution business.

The company made just over half its 2013 revenue of $3.48 billion from commercial aircraft, with about a third coming from consumables management, as the spare parts business is known. Consumables management is the slowest-growing part of the company. The rest of B/E Aerospace's revenue comes from luxury fittings for business jets.

In 2008, B/E Aerospace bought the consumables distribution business of Honeywell (HON.N) for $1 billion to create what it describes as the world's largest distributor of fasteners or specialist bolts, operating in a market estimated at $4.5 billion a year.

Most analysts said a sale was most likely to work if B/E Aerospace split the interiors business from distribution. And several researchers, including Oppenheimer, said the abrupt weekend announcement suggested talks were already under way.

B/E Aerospace shares have risen 40 percent in the past year. In midday trading in New York the stock was up 10.8 percent at

$98.60.

Several brokers raised their price targets to as much as $121, while noting aerospace acquisitions are looking expensive as commercial suppliers ride a wave of orders and increases in production.

B/E Aerospace shares trade at 19.1 times this year's forecast earnings, compared with an average multiple of 16.3 for its industry peers, according to Thomson Reuters data.

The company, which has net debt of $1.6 billion, has an enterprise value of 11.6 times its forecast earnings before interest, tax, depreciation and amortisation, giving it a premium over the sector average of 10.2, according to the data.

Scott Thompson, who heads PricewaterhouseCoopers' aerospace and defence coverage, said the announcement from B/E underscored growing interest in acquisition and mergers.

"We see things heating up," said Thompson, who put out a study last week predicting increased M&A activity this year.

B/E management likely has a clear idea of what they can get for the company, and is in a strong position having posted robust earnings in a market ripe with potential investors, said George Young, a partner at St. Denis J. Villere & Co LLC, which owns about 2 percent of the company.

He's hoping for a deal priced at the top end of broker targets.

"If it's less than $120 per share, then I would be somewhat disappointed," Young said.

(Additional reporting by Victoria Bryan, Cyril Altmeyer, Andrea Shalal, Soyoung Kim, Lewis Krauskopf and Alwyn Scott, Writing by Victoria Bryan, Tim Hepher,; Editing by Erica Billingham; and Peter Galloway)

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