British aerospace firm Meggitt said on Tuesday it struck a deal to buy U.S. aircraft part maker K&F Industriesfor $1.1 billion, as it reported a 14% rise in 2006 underlying profit.
Chief Executive Terry Twigger said the acquisition would bolster Meggitt's position in aircraft wheels and brakes and help its sales to the U.S. Department of Defense, among others.
"This deal offers great value to our shareholders," Twigger said in a telephone interview, adding that K&F trades at roughly the same multiple as Meggitt.
K&F said the deal would involve a cash offer at $27 a share, versus a Monday close of $24.50, valuing its equity at $1.1 billion. Meggitt would also take on about $700 million in debt -- roughly equal to its net debt at the end of 2006.
The price represents a premium of 10% over K&F's closing price on Monday and a premium of 54% over its $17.50 initial public offering in August 2005.
Shares of K&F rose on the New York Stock Exchange, while Meggitt's stock moved higher on the London Stock Exchange.
Meggitt plans to fund the acquisition in part through a one-for-two rights issue at 200 pence per share to raise approximately $815.4 million (424 million pounds) net of expenses, it said in a statement to the London Stock Exchange.
"This represents a major step forward for the company," said a research note from analyst Harry Phillips at EVO Securities, who holds an "add" rating and a 340 pence target price on Meggitt. He said K&F would give Meggitt a strong position in brakes for business and regional jets.
Meggitt posted 132.7 million pounds in 2006 profit before tax, amortization, exceptionals, inventory reevaluations and financial instruments. Its 2006 turnover rose 9% to 670.3 million pounds.
K&F is one-third the size in turnover, with $424 million in 2006 and $146.4 million in adjusted operating profit.
Twigger said in the interview that the addition of K&F would bring strength in steel brakes to complement a strong position in carbon brakes gained in its 2004 takeover of Dunlop Aerospace.
Its main rivals in the sector are Goodrich , Honeywell International , and Messier-Dowty.
"We expect the acquisition to create material synergies and be significantly earnings-enhancing in the first full year of ownership," Meggitt said.
Overall the company is benefiting from a surge in airliner orders seen over the past two years and strong U.S. military spending.
Meggitt, which makes products including aircraft flight displays, fire-detection systems and unmanned air vehicles, announced a final dividend of 6 pence, up 13%.
It said it had reorganized the company into three divisions: Aerospace Equipment, Sensing Systems and Defense Systems.
In 2006, it acquired Radatec, Keith Products and Firearms Training Systems in deals worth about 90 million pounds combined.
The K&F takeover is subject to approval by both sets of shareholders as well as regulators.
The companies said that Goldman Sachs advised K&F and NM Rothschild advised Meggitt.