By Calvin Biesecker
Textron [TXT] on Monday said it has agreed to acquire United Industrial Corp. [UIC] for $1.1 billion in cash, a deal that gives it a strong platform in the Unmanned Aircraft System (UAS) market while further expanding its portfolio of defense business.
The deal is expected to close later this year and Textron expects it to be dilutive to earnings per share by 9 cents next year.
For UIC shareholders, in particular those that have been with the company when it began to turnaround its sagging fortunes beginning in 2003, Textron’s $81 per share offer is a welcome reward. In 2002 UIC’s then leadership had resisted selling the company despite growing pressure from dissident shareholders to do so. At the time the company’s stock price had approached $25 per share.
Then late in 2002 the company disclosed that its Detroit Stoker energy business–which was sold last year–faced asbestos litigation, sending its stock price tumbling to around $12 per share. Prior to that disclosure, UIC’s shareholders had already voted in favor of a proposal by Steel Partners, the company’s largest shareholder and lead proponent of a sale of the company, to give it a position on the board of directors.
With the company underperforming and sale prospects greatly diminished, the company’s then president and CEO Richard Erkeneff announced his retirement in the summer of 2003. Fred Strader, who was leading the company’s defense business, AAI Corp., was tapped as his successor. UIC’s stock had already begun to climb out of its hole in early 2003 and under Strader’s leadership continued to gain momentum as the AAI defense business grew and diversified.
UIC, which essentially consists solely of its defense business today, expects to have $689 million in sales, led by its Shadow Tactical UAS program for the Army and UAS ground control business. The UAS business is about 56 percent of UIC’s sales.
UIC’s service and logistics business, which includes performance based logistics, helicopter engine maintenance repair and overhaul, and aircraft maintenance training devices, accounts for about 25 percent of company sales. UIC also makes test systems for aircraft electronic warfare systems and for aircraft and satellite factory test equipment, which accounts for 14 percent of sales. The rest of the company’s business is in training and advanced programs.
“AAI is a superb strategic fit for Textron,” Lewis Campbell, Textron’s chairman, president and CEO, said in a statement. “It is in perfect alignment with our strategy to add important capabilities to our existing aircraft and defense businesses, adding new products and capabilities to further serve our government, military and homeland security customers. Textron is a recognized leader in manned, fixed and rotary wing aircraft. The addition of AAI broadens our leadership into unmanned vehicles. This combination of capabilities represents a very powerful growth platform, both in the near and long term.”
AAI will become part of Textron’s Bell segment with most of the business operating within Textron Systems, a developer and provider of precision systems, surveillance systems, marine craft, armored vehicles, aircraft control systems and intelligence and communications systems.
“AAI will enable us to deliver broader and more integrated solutions to our customers, whether deploying our precision weapons, networking our unattended ground sensors, integrating with our intelligence software, or benefitting from the service and logistics that support them all,” Frank Tempesta, president of Textron Systems, said in a statement.
The addition of AAI also could help Textron’s current UAS business, which is based on the Eagle Eye tiltrotor UAS the company has been developing for the Coast Guard. Textron also says that AAI’s engine overhaul business is one of the key growth areas for Bell Helicopter.
This acquisition offers synergies with Bell Helicopter as well. Dick Millman, president and CEO of Bell Helicopter, commented, “In addition to Textron Systems’ expertise in situational awareness, intelligence gathering and precision weapons, we have experience in surveillance and reconnaissance with ground breaking unmanned aircraft systems, such as Bell Helicopter’s Eagle Eye–the first-ever unmanned tiltrotor aircraft. Our ability to address these growth opportunities will be strengthened by AAI’s capabilities. Further, AAI’s engine overhaul capability supports one of the key growth areas for Bell Helicopter, complementing our $1 billion helicopter support and service business.”
S.G. Cowen defense analyst Cai von Rumohr said in a note to clients that AAI represents a “great fit” for Textron’s Bell segment, although he said the deal is expensive and may not be accretive to earnings until 2010. J.P. Morgan analyst Stephen Tusa believes the deal will be accretive to earnings in 2009.
Textron provided broad financial guidance for its growth in the coming years. Between 2007 and 2012 it expects to grow organically at 8.5 percent on an annual basis and 12 percent annually with synergies as a result of the pending acquisition.
Textron’s financial advisers on the deal were Merrill Lynch & Co. and Rothschild Inc. UIC was advised by J.P. Morgan.