The business of aviation parts and services is relying more on digital operations to keep plains off the ground and flying, as industry experts said at last month’s annual Aviation Week MRO Americas conference.
The Boeing Co. is at the forefront of that trend, with the development in recent years of its fast-growing Aviall parts and services business—an online powerhouse in aviation maintenance operations. And now Boeing is out to build out Aviall more by agreeing to acquire for more than $3 billion KLX Inc, a company that launched its e-commerce site in 2015 and, according to KLX chairman and CEO Amin Khoury, has already approached the $100 million mark in annual online sales.
Boeing Co. said today it agreed to acquire KLX for about $3.25 billion as the world’s largest aircaft manufacturer bolsters its fast-growing Aviall division that offers maintenance, spare parts and other services to airlines. Aviall, which sells online at Aviall.com, operates as part of Boeing Global Services, which also includes the manufacturer’s online Modification Marketplace for airlines that need to retrofit aircraft.
The aircraft maker will pay $63 a share, contingent on the separation of KLX’s Energy Services Group, Boeing said in a statement Tuesday. Boeing also will assume about $1 billion in net debt. KLX said it plans to spin off the energy operation to shareholders.
“This acquisition is the next step in our services growth strategy, with a clear opportunity to profitably grow our business and better serve our customers in a $2.6 trillion, 10-year services market,” said Stan Deal, president and CEO of Boeing Global Services. “By combining the talent and product offerings of Aviall and KLX Inc., we will provide a one-stop-shop that will benefit our supply chain and our various customers in a meaningful way.”
“Our customers have long desired a supplier who could offer essentially 100% of their requirements for fasteners, consumables and expendables,” added Khoury. “The combination of Aviall and KLX Aerospace facilitates the broadest scope of parts and products to support all customer fleet types for the commercial, military and defense and business and general aviation markets. This business combination will enable us to deliver industry-leading value-added service solutions for our customers, and outstanding growth opportunities for our suppliers.”
The deal is the largest struck so far by Boeing CEO Dennis Muilenburg, who has been scouting acquisitions that would more than triple sales at Boeing’s services business to $50 billion within a decade. Boeing has held preliminary talks with partsmaker Woodward Inc., according to media reports in February, and is deep into talks to form a joint venture that would give it control of Embraer SA’s commercial jets.
KLX will become part of Boeing Global Services and will be fully integrated with the Aviall, a Boeing subsidiary with an anticipated annual cost savings of $70 million by 2021, according to the statement. Boeing’s 2018 guidance, capital deployment strategy and commitment to returning free cash flow to shareholders won’t change, the Chicago-based company said. Boeing expects the acquisition to be earnings neutral through next year.
“We continue to see global services as our biggest market-growth opportunity,” Muilenburg told reporters at the company’s annual meeting Monday, hours before the deal was announced. The transaction will be financed primarily with cash on hand, supplemented with debt.
While Boeing remains focused on organic growth, the company is exploring targeted takeovers and investments to round out its product portfolio, he said. Boeing is also scouting deals in areas such as avionics—electronic communications or navigation equipment—where the aircraft manufacturer is taking over work previously handled by suppliers.
Boeing created the services division last year by assembling an assortment of highly profitable units that support customers and altogether account for about 15% of total sales. The foray rattled aerospace suppliers and enginemakers, which typically make the bulk of their profit tending to aircraft over 30-year commercial lives.
KLX, which was spun out of B/E Aerospace Inc. in 2014 amid pressure from shareholder activists, generated about 90% of its $1.49 billion in sales from aircraft parts and aftermarket services in its most recent fiscal year. The Aerospace Solutions Group has approximately 2,000 employees with customer-service centers in about 15 countries.
The rest of KLX’s revenue came from the operation catering to oil and gas drillers, which is to be sold before the Boeing purchase. Revenue in the energy-services division has tumbled 60% to $153.2 million since the separation as oil prices fell, according to data compiled by Bloomberg.
“The spinoff makes the realization of value for investors more complicated as the deal is predicated on a successful divestiture of KLXI’s Energy assets,” Michael Ciarmoli, an analyst at SunTrust Robinson Humphrey, said in a note to investors, referring to the company’s KLXI stock symbol. “We think investors would have preferred a takeout of the whole company.”
KLX fell 7.3 percent to $72.50 before the start of regular trading in New York. The stock closed Monday up 27% from its price before KLX said in December that it was exploring strategic alternatives. Boeing rose less than 1 percent to $333.59 in premarket trading Tuesday.
Speculation of a possible tie-up with Boeing has swirled since KLX’s announcement that that it was reviewing options. Boeing approached the aerospace partsmaker last year before the strategic review, DealReporter said in an account earlier this year.
KLX would add about $500 million in distribution sales to Aviall, which generates about 40% of annual revenue at the company’s services division, said Ken Herbert, an analyst at Canaccord Genuity.
Boeing would add between $1 billion and $1.5 billion to its annual services sales if it pulled off a separate deal with Embraer, which specializes in regional jets, Herbert wrote in a report earlier this year.
The purchase of KLX is expected to close by the third quarter, subject to shareholder and regulatory approvals.
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