TransDigm dives deeper into aero spare parts market with Esterline buy

(Reuters) - Aircraft parts supplier TransDigm Group Inc TDG.N has agreed to buy smaller rival Esterline Technologies Corp ESL.N for about $3.6 billion in its biggest-ever deal, as it seeks the heft to compete with Boeing Co BA.N and Airbus SE AIR.PA in after-sales plane servicing.

The world’s two biggest planemakers have been pushing into the high-margin business of supplying parts and services to boost profits, threatening TransDigm, which has been building a group of parts producers and suppliers. The company has inked 49 deals since its market debut in 2006.

TransDigm has a good track record of integrating some of the large acquisitions in the past, said Vertical Research Partners analyst Robert Stallard.

“Esterline fits the TransDigm M&A criteria, being majority A&D (aerospace and defense) with a large aftermarket portfolio focused on components like knobs, sensors, and materials,” Stallard wrote in a note titled “Go Big or Go Home.”

The $122.50-per-share cash offer represents a 38 percent premium to Esterline’s Tuesday close and is 62 percent more than the stock’s closing price on July 19, when reports of the company exploring a potential sale emerged.

Shares of Bellevue, Washington-based Esterline hit a more than 3-year high of $115.78 in early trading, while those of TransDigm fell about 4 percent to $336.85.

Esterline, which is expected to generate 2018 revenue of about $2 billion, makes cockpit parts and sensors for commercial jetliners, business jets and military aircraft such as Lockheed Martin's LMT.N F-35 fighter jets.

“Esterline’s core aerospace and defense business consists of primarily proprietary, sole source products with significant and growing aftermarket exposure,” TransDigm Executive Chairman Nicholas Howley said, adding that the business is highly complementary.

The deal is the latest in a string of acquisitions in the aerospace industry. Last year, United Technologies Corp UTX.N struck a $30 billion deal to buy Rockwell Collins Inc, and Boeing said in May it would buy aerospace parts company KLX Inc in a $3.2 billion deal.

TransDigm will fund the deal mainly through cash on hand and term loans.

The company said it expected the deal to add to its adjusted earnings within the first year following the close of the deal in the second half of 2019.

Reuters reported in July that Esterline was exploring a sale.

Morgan Stanley is the financial adviser for TransDigm, while Goldman Sachs is advising Esterline.

Reporting by Arunima Banerjee and Ankit Ajmera in Bengaluru; Editing by Saumyadeb Chakrabarty and Anil D’Silva