Rockwell Collins (COL.N), which is looking to opportunities in the commercial market as its defense business comes under pressure, is buying Arinc, an aerospace communications company, for $1.39 billion.
Rockwell, a supplier of avionics and other electronic systems for airplanes, said the purchase from Carlyle Group LP (CG.O) would enable it to expand sales as newer airplanes are equipped with information-management systems for the flight deck and cabin.
Annapolis, Maryland-based Arinc designs systems that help airline pilots communicate with the ground. It also provides transport communications and systems for defense, government, healthcare and other sectors.
Rockwell Collins is counting on commercial demand to drive growth as the United States curbs defense spending. As of its most recent quarterly earnings report, Rockwell Collins sales were roughly split 51 percent-49 percent between government sales and commercial sales.
"We're definitely ... going to shift from overweight in defense to an overweight in commercial, and we want to accelerate that, given the challenges we have in the defense market," Kelly Ortberg, who assumed the CEO job at Rockwell Collins from longtime executive Clay Jones this month, said in an interview on Monday.
Arinc will allow Rockwell Collins "to provide a broader set of solutions to our customers in moving digital information from the airplane to the ground and back," Ortberg said.
He said the growth opportunities the purchase brings Rockwell were akin to the new capabilities a home acquires when it gets Internet access.
"We have long looked at the Arinc aviation business as a great opportunity for us," Ortberg added.
For Rockwell, those opportunities include providing information tied to plane maintenance and security, passenger operations and other services.
"There's some longer-term opportunities to link what Rockwell does on the avionics with what Arinc does in ground-to-air communications," Michael Derchin, an analyst with CRT Capital Group, said. "They are likely looking at longer-term new product development that can be additive."
Derchin said Rockwell's shares were likely under pressure on Monday because the company indicated it would issue debt to finance the acquisition and said it would slow the pace of its share repurchase activity, which has helped bolster recent per-share earnings.
Ortberg said Rockwell Collins would not likely take on another purchase of the Arinc size over the next couple of years, but added the company will continue to consider acquisitions that provide bolt-on capabilities.
Rockwell Collins has been hard hit by program cancellations in recent years as the United States, the world's largest weapons buyer, curbed spending. In response, Rockwell has reduced its business in some defense segments, curbed unnecessary research and development expenses and cut jobs.
Shares of Rockwell Collins were off 1.4 percent at $73.41 in afternoon trading on Monday, while shares of Carlyle Group were off 0.3 percent at $26.96.
(Reporting by Karen Jacobs in Atlanta; Editing by Phil Berlowitz and Leslie Adler)