European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

On 11 August, <a href="https://www.smartkarma.com/entities/meggitt-plc" target="_blank" data-smartkarma-citation="entities:22044:1" rel="noopener">Meggitt PLC (MGGT LN)</a> said it received an unsolicited, preliminary and non-binding c. £7.1 bn cash takeover proposal, 900p/share, from <a href="https://www.smartkarma.com/entities/transdigm-group-inc" target="_blank" data-smartkarma-citation="entities:2592:1" rel="noopener">Transdigm Group (TDG US)</a>, thus trumping the £6.3 billion agreed and recommended takeover offer from <a href="https://www.smartkarma.com/entities/parker-hannifin-corp" target="_blank" data-smartkarma-citation="entities:6289:1" rel="noopener">Parker Hannifin (PH US)</a>. TransDigm also mentioned the possibility to change the composition of any offer (it could be cash and shares).
Meggitt said it is reviewing the proposal from TransDigm and has provided it with due diligence access. Meggitt stated it plans to carefully consider the terms of any offer and TransDigm's plans for the company, including any impact on employees, stakeholders and customers. It said that there is no certainty any firm offer will be made. 
Nevertheless, Meggitt added that it continues to recommend Parker's 800p/share cash offer, agreed on 2 August. 
<ul>
<li>"The board of Meggitt believes Parker's offer continues to represent an attractive proposition for Meggitt's shareholders and for its broader stakeholders".</li>
<li>Meggitt said that it will be seeking an order giving it permission to convene a shareholder meeting for considering and approving the scheme to implement the acquisition by Parker.</li>
<li>The Times reported that the chairman of Meggitt, Nigel Rudd, has separately called on the UK to block any takeover by bidders who fail to offer binding commitments on investment and jobs.</li>
<li>Meggitt announced on a6 August that it had published documents in relation to the offer, with a date set for a shareholder vote on 21 September.</li>
</ul>
The Takeover Panel has given TransDigm a put up or shut up deadline by which it must make a firm intention to make a formal offer to back up its provisional 900p/share approach by 14 September. The Panel also said that this deadline would cease to apply if a third party other than TransDigm makes a firm offer for Meggitt.
<div>
As a reminder, Parker Hannifin announced the purchase of Meggitt for £6.3 bn, and has pledged with the British Government to maintain employment to avoid potential regulatory problems. The cash offering of 800p/share is a 71% premium over Meggitt's closing on 30 July, for an implied equity value of £6,308.4 mn and implied EV of £7,131 mn and 23.4x EV/21e EBITDA and 44.4x P/21e E (source: Capital IQ consensus). Cost synergies are expected to reach $300 mn.
The main issue with a potential offer from TransDigm is its leverage (8.5x net debt/EBITDA, and 1.5x EBIT/interest, with some of its latest issued bonds trading at 5.19% YTW and rated B- by S&amp;P). If successful in the pursuit of Meggitt, net debt would increase to c. $25 bn and debt issued at an offering yield north of 5.5%, which is why shares could be offered as part of the consideration.
PH's management expects to achieve cost synergies of $300 million (approximately 10% of sales) by the end of the third year at a cost of $240 million. Considering performance of Meggitt in FY2023 comes closer to that of FY2019 (EBITDA of £493 mn in FY 2019 vs. Capital IQ 2023e EBITDA consensus estimates of £461 mn). Using Capital IQ consensus figures and assuming an incremental contribution of $4.3/share to TransDigm, EPS would increase by 17% by FY2024.
Recommendation is maintain long Meggitt, TP 900p. Shares of Meggitt closed at 838.8p on 20 August. Gross (and mostly likely annualised) spread to potential offer is 6.8%. Upside could come from new suitors. There is potential downside risk in case TransDigm's offer does not materialize, although I do not believe the company is bluffing.
</div>

On 11 August, Meggitt PLC (MGGT LN) said it received an unsolicited, preliminary and non-binding c. £7.1 bn cash takeover proposal, 900p/share, from Transdigm Group (TDG US), thus trumping the £6.3 billion agreed and recommended takeover offer from Parker Hannifin (PH US). TransDigm also mentioned the possibility to change the composition of any offer (it could be cash and shares).
Meggitt said it is reviewing the proposal from TransDigm and has provided it with due diligence access. Meggitt stated it plans to carefully consider the terms of any offer and TransDigm's plans for the company, including any impact on employees, stakeholders and customers. It said that there is no certainty any firm offer will be made. 
Nevertheless, Meggitt added that it continues to recommend Parker's 800p/share cash offer, agreed on 2 August. 

"The board of Meggitt believes Parker's offer continues to represent an attractive proposition for Meggitt's shareholders and for its broader stakeholders".
Meggitt said that it will be seeking an order giving it permission to convene a shareholder meeting for considering and approving the scheme to implement the acquisition by Parker.
The Times reported that the chairman of Meggitt, Nigel Rudd, has separately called on the UK to block any takeover by bidders who fail to offer binding commitments on investment and jobs.
Meggitt announced on a6 August that it had published documents in relation to the offer, with a date set for a shareholder vote on 21 September.

The Takeover Panel has given TransDigm a put up or shut up deadline by which it must make a firm intention to make a formal offer to back up its provisional 900p/share approach by 14 September. The Panel also said that this deadline would cease to apply if a third party other than TransDigm makes a firm offer for Meggitt.

As a reminder, Parker Hannifin announced the purchase of Meggitt for £6.3 bn, and has pledged with the British Government to maintain employment to avoid potential regulatory problems. The cash offering of 800p/share is a 71% premium over Meggitt's closing on 30 July, for an implied equity value of £6,308.4 mn and implied EV of £7,131 mn and 23.4x EV/21e EBITDA and 44.4x P/21e E (source: Capital IQ consensus). Cost synergies are expected to reach $300 mn.
The main issue with a potential offer from TransDigm is its leverage (8.5x net debt/EBITDA, and 1.5x EBIT/interest, with some of its latest issued bonds trading at 5.19% YTW and rated B- by S&amp;P). If successful in the pursuit of Meggitt, net debt would increase to c. $25 bn and debt issued at an offering yield north of 5.5%, which is why shares could be offered as part of the consideration.
PH's management expects to achieve cost synergies of $300 million (approximately 10% of sales) by the end of the third year at a cost of $240 million. Considering performance of Meggitt in FY2023 comes closer to that of FY2019 (EBITDA of £493 mn in FY 2019 vs. Capital IQ 2023e EBITDA consensus estimates of £461 mn). Using Capital IQ consensus figures and assuming an incremental contribution of $4.3/share to TransDigm, EPS would increase by 17% by FY2024.
Recommendation is maintain long Meggitt, TP 900p. Shares of Meggitt closed at 838.8p on 20 August. Gross (and mostly likely annualised) spread to potential offer is 6.8%. Upside could come from new suitors. There is potential downside risk in case TransDigm's offer does not materialize, although I do not believe the company is bluffing.


TransDigm/Meggitt: Unsolicited Potential 900p Offer

Equity Analyst, Event-driven, Quiddity Advisors

Janaghan Jeyakumar, CFA

Equity Analyst, Event-driven

Quiddity Advisors

Pan-Asia Catalysts/Events

In my previous insight, <a href="https://www.smartkarma.com/insights/hexcel-woodward-another-aircraft-supplier-merger" target="_blank" data-smartkarma-citation="insights:35769" rel="noopener">Hexcel-Woodward: Another Aircraft Supplier Merger</a>, I mentioned that some Hexcel shareholders might be unhappy with the weak/non-existent premium offered in the Deal. Although both companies' shares have dropped slightly from post-announcement highs, the spread remains positive implying a low probability of a bump. However, in this insight, we take a closer look at the fundamentals to see if a bump is justified. The Deal which will see US-based aircraft component suppliers <a href="https://www.smartkarma.com/entities/hexcel-corp" target="_blank" data-smartkarma-citation="entities:6699:1" rel="noopener">Hexcel Corp (HXL US)</a> and <a href="https://www.smartkarma.com/entities/woodward-inc" target="_blank" data-smartkarma-citation="entities:11464:1" rel="noopener">Woodward Inc (WWD US)</a> combine in a US$6.4Bn all-stock merger of equals was <a href="https://investors.hexcel.com/investor-news/news-details/2020/Woodward-and-Hexcel-Announce-Merger-of-Equals-to-Create-a-Premier-Integrated-Systems-Provider-Propelling-the-Future-of-Flight-and-Energy-Efficiency/default.aspx" target="_blank" rel="noopener">announced</a> on Sunday 12th January. The transaction is expected to close in the third calendar quarter of 2020 and requires regulatory approvals and shareholder approvals from both companies. The grounding of the Boeing 737 Max has added more pressure to the industry of aircraft component suppliers who were already consolidating in preparation to meet future R&amp;D spending requirements. Despite this rush to consolidate, the Deal feels light considering the magnitude of benefits expected post-completion. So is a bump in terms justified?We think so... for a multiple reasons explained below.

In my previous insight, Hexcel-Woodward: Another Aircraft Supplier Merger, I mentioned that some Hexcel shareholders might be unhappy with the weak/non-existent premium offered in the Deal. Although both companies' shares have dropped slightly from post-announcement highs, the spread remains positive implying a low probability of a bump. However, in this insight, we take a closer look at the fundamentals to see if a bump is justified. The Deal which will see US-based aircraft component suppliers Hexcel Corp (HXL US) and Woodward Inc (WWD US) combine in a US$6.4Bn all-stock merger of equals was announced on Sunday 12th January. The transaction is expected to close in the third calendar quarter of 2020 and requires regulatory approvals and shareholder approvals from both companies. The grounding of the Boeing 737 Max has added more pressure to the industry of aircraft component suppliers who were already consolidating in preparation to meet future R&amp;D spending requirements. Despite this rush to consolidate, the Deal feels light considering the magnitude of benefits expected post-completion. So is a bump in terms justified?We think so... for a multiple reasons explained below.

On Sunday 12th January, US-based aircraft component suppliers Hexcel Corp and Woodward Inc <a href="https://investors.hexcel.com/investor-news/news-details/2020/Woodward-and-Hexcel-Announce-Merger-of-Equals-to-Create-a-Premier-Integrated-Systems-Provider-Propelling-the-Future-of-Flight-and-Energy-Efficiency/default.aspx" target="_blank" rel="noopener">announced</a> they would combine in a US$6.4Bn all-stock merger of equals to form "a premier integrated systems provider serving the aerospace and industrial sectors".Under the terms of this Offer, Hexcel shareholders will receive 0.625 Woodward shares per Hexcel share. On a fully diluted basis, the existing shareholders of Woodward and Hexcel will own 55% and 45%, respectively, of the combined entity. The deal is conditional on the receipt of antitrust clearance and approvals from the shareholders of both Hexcel and Woodward. The transaction is expected to be completed in the third calendar quarter of 2020.At the time of writing, the Deal is trading close to terms with a view to complete. That obviously includes a high likelihood of deal completion as-is, a small probability of dealbreak, and some probability of a deal bump.

On Sunday 12th January, US-based aircraft component suppliers Hexcel Corp and Woodward Inc announced they would combine in a US$6.4Bn all-stock merger of equals to form "a premier integrated systems provider serving the aerospace and industrial sectors".Under the terms of this Offer, Hexcel shareholders will receive 0.625 Woodward shares per Hexcel share. On a fully diluted basis, the existing shareholders of Woodward and Hexcel will own 55% and 45%, respectively, of the combined entity. The deal is conditional on the receipt of antitrust clearance and approvals from the shareholders of both Hexcel and Woodward. The transaction is expected to be completed in the third calendar quarter of 2020.At the time of writing, the Deal is trading close to terms with a view to complete. That obviously includes a high likelihood of deal completion as-is, a small probability of dealbreak, and some probability of a deal bump.

Hexcel-Woodward: Another Aircraft Supplier Merger

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

The S&amp;P 500 continues to hover below critical resistance at its 200-day moving average while market participants remain in a wait-and-see mode for new developments on U.S.-China trade and details on the latest border security proposal. At the same time, breadth improvements have extended to our Manufacturing Sector - a welcomed sight given its cyclical nature.  We are Upgrading Manufacturing to market weight from underweight. Our cap-weighted Manufacturing Sector has steadily improved in our RSR ranks due in large part to strength in Aerospace &amp; Defense Groups. In today’s report we highlight attractive Groups within Manufacturing and Technology..

The S&amp;P 500 continues to hover below critical resistance at its 200-day moving average while market participants remain in a wait-and-see mode for new developments on U.S.-China trade and details on the latest border security proposal. At the same time, breadth improvements have extended to our Manufacturing Sector - a welcomed sight given its cyclical nature.  We are Upgrading Manufacturing to market weight from underweight. Our cap-weighted Manufacturing Sector has steadily improved in our RSR ranks due in large part to strength in Aerospace &amp; Defense Groups. In today’s report we highlight attractive Groups within Manufacturing and Technology..

U.S. Equity Strategy: Upgrading Manufacturing Sector

Large-cap aerospace and defense stocks remain leadership, emerging from recent market volatility to achieve new relative strength highs. Aero/defense-related names continue to be favorites of ours within the Manufacturing Sector.  In today’s report we highlight the following names: Lockheed Martin (LMT), General Dynamics (GD), Huntington Ingalls Industries (HII), TransDigm (TDG), Textron (TXT), Teledyne Technologies (TDY), Embraer S.A. ADR (ERJ), and L3 Technologies (LLL).

Large-cap aerospace and defense stocks remain leadership, emerging from recent market volatility to achieve new relative strength highs. Aero/defense-related names continue to be favorites of ours within the Manufacturing Sector.  In today’s report we highlight the following names: Lockheed Martin (LMT), General Dynamics (GD), Huntington Ingalls Industries (HII), TransDigm (TDG), Textron (TXT), Teledyne Technologies (TDY), Embraer S.A. ADR (ERJ), and L3 Technologies (LLL).

United States

TransDigm Group, Inc., through subsidiaries, manufactures aircraft components. The Company produces ignition systems and components, gear pumps, mechanical/electromechanical actuators and controls, NiCad batteries/chargers, power conditioning devices, hold-open rods and locking devices, engineered connectors and latches, cockpit security devices, and AC/DC electric motors.

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Transdigm Group (TDG US)

TransDigm/Meggitt: Unsolicited Potential 900p Offer

Meggitt's Board is playing hard-to-get with TransDigm. Acquisition would be accretive but main obstacle is leverage. Maintain long position in MGGT...

Jesus Rodriguez Aguilar

Hexcel-Woodward: Is the Offer Fair?

In my previous insight, Hexcel-Woodward: Another Aircraft Supplier Merger, I mentioned that some Hexcel shareholders might be unhappy with the...

Janaghan Jeyakumar, CFA

Hexcel-Woodward: Another Aircraft Supplier Merger

On Sunday 12th January, US-based aircraft component suppliers Hexcel Corp and Woodward Inc announced they would combine in a US$6.4Bn all-stock...

Janaghan Jeyakumar, CFA

U.S. Equity Strategy: Upgrading Manufacturing Sector

The S&P 500 continues to hover below critical resistance at its 200-day moving average while market participants remain in a wait-and-see mode...

Vermilion Research

U. S. Aerospace & Defense Lifting Off

Large-cap aerospace and defense stocks remain leadership, emerging from recent market volatility to achieve new relative strength highs....

Vermilion Research

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