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The Largest Aerospace Deal of 2013: Rockwell Collins Buys Arinc For $1.4 Billion

Aug 12, 2013 2:27 pm

Rockwell Collins

Rockwell Collins' Pro Line Fusion integrated avionics system. Rockwell Collins


Rockwell Collins Inc. Chief Executive Officer Kelly Ortberg landed Arinc Inc., the company’s biggest acquisition, after months of talks with owner Carlyle Group LP — and just 11 days in the new job.

The $1.39 billion transaction announced yesterday is the largest U.S. aerospace and defense deal unveiled this year and will expand Rockwell Collins’s aerospace business outside the cockpit by combining its avionics and cabin technologies with Arinc’s ground-based communications networks. Carlyle bought Arinc from American Airlines and other carriers in 2007.

Ortberg, 53, said he led the acquisition effort in his previous post as president of Cedar Rapids, Iowa-based Rockwell Collins before adding the CEO role Aug. 1, replacing Clay Jones, who retired. Ortberg said the purchase gives Rockwell Collins a profitable company whose air-to-ground communications system is widely used by airlines and airports globally.

“Obviously this isn’t something that we cooked up overnight,” Ortbert said in a phone interview today. “We’ve been working on this deal for months. We long viewed Arinc as an attractive portfolio.”

The aerospace equipment maker also gets a cushion against future U.S. defense cuts since about 85 percent of Arinc’s revenue is derived from commercial customers. The purchase will shift Rockwell Collins’s business mix to 54 percent commercial and 46 percent government.

Commercial Mix

Rockwell Collins’s current breakdown is 52 percent of sales from government contracts and 48 percent from the private sector, Cindy Dietz, a spokeswoman, said by e-mail. The company said it expects the transaction to close within 90 days.

“Rockwell Collins is in the front of the plane with avionics. Arinc is an extension into that part of the navigational-system world,” said Michael Derchin, a Stamford, Connecticut-based analyst at CRT Capital Group LLC whose rating of fairly valued on the stock is the equivalent of hold. “It sounds like a fit for what they do.”

Rockwell Collins fell 1.6 percent to $73.22 at 12:05 p.m. in New York. Washington-based Carlyle slid 0.7 percent to $26.86.

“Arinc will provide a serious acceleration” back toward a business tilted toward commercial sales, Robert Stallard, a Royal Bank of Canada analyst, said in a note to clients. Stallard, who rates the shares as outperform, said transaction and integration costs probably will dilute earnings per share in the company’s next fiscal year.

Carlyle Investment

For Carlyle, the world’s second-largest manager of alternative assets such as private equity and real estate, the sale adds to the disposal of shares in seven companies in the second quarter. Co-CEO Bill Conway said on an Aug. 7 conference call that the firm will invest less than the $7.9 billion it did last year, reversing an earlier prediction for an increase.

Carlyle invested $257 million of equity in the 2007 Arinc acquisition, according to a fund marketing document, a copy of which was obtained by Bloomberg.

Until the sale to Carlyle, for which terms weren’t disclosed, Arinc had been owned by airlines since its founding in 1929 to handle air-to-ground communications. The Annapolis, Maryland-based company now helps more than 14,000 commercial aircraft make more than 100,000 takeoffs and landings daily, according to its website.

Arinc Sales

Arinc will have about $600 million in revenue this year, according to Rockwell Collins, which said last month that sales in its current fiscal year would be about $4.65 billion.

Ortberg is trying to expand Rockwell Collins’s reach beyond aircraft by acquiring Arinc’s computer networks, which help handle data for pilots, passengers, regulators and airports. Arinc also provides communication and information-technology services to industries outside aviation, including railroads.

While Rockwell Collins’s 28 percent stock-price surge this year through Aug. 9 beat the 19 percent advance for the Standard & Poor’s 500 Index, that jump only left it in the middle of the pack compared with peers. The S&P Supercomposite Aerospace & Defense Index of 28 companies rose 31 percent in 2013.

Precision Castparts Corp.’s $600 million purchase of Permaswage SAS from Bridgepoint Advisers Ltd. was the year’s previous record acquisition in aerospace and defense announced in North America, according to data compiled by Bloomberg.

Paris Air Show

Ortberg joined Rockwell Collins in 1987 and had been president since September. He had previously led the Government Systems unit and helped oversee development of equipment for the Boeing Co. 787 while running the Commercial Systems division. Jones remains with the company as nonexecutive chairman.

In a June 19 interview at the Paris Air Show, Ortberg said the company would seek to win work on cockpit avionics as Boeing upgrades the 777, the planemaker’s biggest twin-engine model. Rockwell Collins displaced Honeywell International Inc. last year as Boeing’s supplier for cockpit displays on the 737 jet. The company also provides cockpit displays, pilot control systems and flight computer systems for the 787 Dreamliner.

Citigroup Inc. acted as Rockwell Collins’s financial adviser and also provided bridge financing for the Arinc transaction, Ortberg said. Evercore Partners Inc. and JPMorgan Chase & Co. acted as co-advisers to Arinc on the deal, according to Abernathy MacGregor, a public relations firm.

With assistance from Sabrina Willmer in New York. Editors: James Callan, John Lear. To contact the reporters on this story: Thomas Black in Dallas at tblack@bloomberg.net; Julie Johnsson in Chicago at jjohnsson@bloomberg.net. To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net. 

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