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 Berkshire chief Warren Buffett isn't alone in seeing potential for
profits from rising demand for commercial aircraft. Private equity
and strategic buyers have been pouring into the sector, and foreign
companies such as China's AVIC and Senior PLC of the UK have
recently been prowling for deals, bankers and company executives
said.
Potentially standing in their way, though, is Boeing, these people
said. Boeing is the biggest customer of most aerospace suppliers,
and is slowing some acquisitions by using its power to approve the
transfer of its supply contracts from one owner to another.
Boeing can act like as an unofficial regulator on aerospace mergers
and acquisitions because of the "assignability clause" inserted in
most of its contracts with suppliers. The clause allows Boeing to
refuse to transfer the contracts to the new owners, giving it a de
facto veto over deals.
Boeing said it hasn't changed the process it uses to scrutinize
mergers and acquisitions among suppliers, and that the time taken
depends on the size and complexity of the deal. Chief Executive
Dennis Muilenburg, who took over July 1, is continuing predecessor
Jim McNerney's policy of "de-risking."
"We have an ability to have our voice heard in the M&A process and
we use that ability," said Kent Fisher, vice president and general
manager of suppliers at Boeing Commercial Airplanes.
But bankers and company owners said approvals from Boeing that used
to take a couple of weeks now take much longer, putting deals at
risk, with no explanation from Boeing for the delay.
"Any time you have a pause in a transaction, it increases the risk
that it won't get across the finish line," said Brian Murphy, a
managing director at Meridian Capital, an investment bank based in
Seattle.
For example, Boeing took four months to approve the purchase of a
small supplier by Liberty Hall Capital Partners, a New York private
equity firm focused on aerospace and defense.
LaCroix Industries, which has 45 employees and was founded in Kent,
Washington, in 1977, has long supplied parts directly to Boeing for
the 737, 777 and 787 jets. It earned awards from Boeing for
near-perfect quality the last seven years, co-founder Philip LaCroix
said.
The company began talks with Liberty Hall last September, and sought
Boeing's blessing in April, he said. Boeing took until July to
consent, and the deal closed that month.
MAJOR SLOWDOWN
"The approvals from Boeing were the major slowdown" and Boeing
wouldn't say what was causing the delay, LaCroix said in an
interview.
"That part of it was frustrating," he said. "You could lose a deal
over something like that, where the acquirer says, 'Hey, I'm out of
this.'"
Liberty Hall declined to comment. It plans to integrate LaCroix into
its Irving, Texas-based Accurus Aerospace Corp subsidiary, which
also supplies Boeing.
LaCroix had already agreed to give Boeing 15 percent price cuts on
existing contracts, starting in 2016. The alternative was slow death
by losing the right to bid on future work, LaCroix said.
"Staying in business with Boeing was much preferable," he said, "and
still had plenty of profit for us."
Some bankers say they routinely exclude potential bidders for a
company if they know those won't pass muster with Boeing, which
looks at financial strength, track record and investment intentions
of prospective buyers. Some also see the logic of talking with
Boeing about meeting assignability requirements, and understand
Boeing's need to minimize supply chain risk.
"Reviewing the companies that would acquire their suppliers is part
of that," said Jet Wales, a managing director at Moss Adams Capital
in Seattle.
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MORE INVESTMENT, MORE RISK
North American aerospace and defense deals shot up 17 percent last
year and their value nearly doubled to about $12 billion, Thomson
Reuters data show. Private equity buyers are involved in an
increasing number of transactions, according to data from PitchBook,
a Seattle firm that tracks transactions, fueling competition for
choice targets.
The big attraction: Boeing's eight-year backlog of commercial jet
orders worth $431 billion. Investors see an assured revenue stream
and have bid up the prices of supplier companies to lofty levels.
Ownership changes can increase risk, however. A stumble by a key
supplier can disrupt Boeing's carefully orchestrated factories and
run up hefty costs.
When Zodiac Aerospace of France failed to deliver premium seats
earlier this year, it delayed delivery of 787s to American Airlines
and hit Boeing with what analysts said were several hundred million
dollars in added costs. Boeing said those estimates are overstated.
Many experts expect Buffett's aerospace purchase will spur even more
consolidation, and likely will prompt Boeing to look even more
closely at deals that affect its suppliers.
Precision Castparts, a 60-year-old firm based in Portland, Oregon,
locked up key aerospace products and production capabilities by
doing its own strategic acquisitions. It is now an integral supplier
of parts for commercial and military aircraft and engines.
"Boeing woke up to the fact after the fact," said Christian
Schiller, a managing director at Cascadia Capital investment bank in
Seattle, referring to Precision's success in achieving vertical
integration. "They couldn't undo it, so they're making sure they can
exert more control over the M&A process to make sure a PCC doesn't
happen again."
He and other bankers said Boeing has a legitimate need to protect
its interests and avoid the rise of another powerful supplier.
"But Boeing should make it easier for the smaller deals to go
forward," Schiller said. "There's no need to take really hard looks
at $10 million to $100 million deals."
Boeing subjects even small deals to detailed scrutiny, such as the
2013 purchase by Kidd & Co and Centerfield Capital Partners of
Imaginetics Inc, then a 120-person precision machining shop in
Auburn, Washington, a top supplier to Boeing. Approval took more
than a month, said a source familiar with the deal. Imaginetics
declined to comment.
"Boeing has turned up the heat on who is the buyer and is taking
longer to decide that a deal is OK," said Michael Black, a principal
at Zachary Scott, an investment bank in Seattle.
"They've got a pretty tough filter and it's gotten tougher and I
don't see that changing."
(Reporting by Alwyn Scott. Editing by Joe White and John Pickering.)
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