(Bloomberg) — Parker-Hannifin Corp., the U.S. maker of industrial motion-control systems, agreed to buy Meggitt Plc for 6.3 billion pounds ($8.8 billion) in cash to strengthen its hand in a rebounding aerospace industry.
Shares of Meggitt surged the most on record after the 170-year-old company said its board would recommend the offer at 800 pence per share, 71% above Friday’s closing price. The massive premium will make it harder for a rival to jump in and snatch the Coventry, England-based target, after a string of U.S. buyouts of British aerospace and defense firms.
The deal would be the biggest ever for Parker-Hannifin, which has stepped up takeovers under Chairman and Chief Executive Officer Tom Williams. The company, which supplies a variety of industries, was on a tear before the coronavirus pandemic, with the $4.3 billion purchase of filtration-products manufacturer Clarcor in 2017, and materials-science specialist Lord Corp. for $3.7 billion in 2019.
Adding Meggitt will nearly double the size of Parker-Hannifin’s aerospace systems unit, it said in a statement. That would position the Cleveland-based company to better compete in an aviation sector that’s just emerging from the biggest slump in history.
“We wanted a price that would be very compelling, that would gain shareholder support and would be very clear that we’re the best owner,” Williams said in an interview. “This is a company we’ve liked for a long time.”
The deal is so big it will rule out further M&A by Parker-Hannifin for the next three years, Williams said, as the company focuses on investment, dividends and paying down debt to lower leverage ratios.
Stock Jump
Monday’s stock move vaults Meggitt above pre-pandemic levels. Prior to the outbreak, the stock had been gaining steadily amid a turnaround under CEO Tony Wood. Meggitt said as far back as 2016 that it would consider offers at the right price.
Meggitt shares jumped 56% to 730.60 pence at 3:55 p.m. in London, after rising as much as 62%. Parker-Hannifin added 0.8% to $314.61 at 10:55 a.m. in New York, after dropping as much as 2%. With a market value of about $40 billion, it’s some five times the size of its target.
U.K. Targets
The deal is the latest example of U.S. buyers eyeing U.K. aerospace. Cobham Ltd., the U.K. defense contractor acquired in 2020 by U.S. private equity firm Advent International Corp., last month made a 2.6 billion-pound approach for Ultra Electronics Holding Plc.
Senior Plc, which makes aerospace parts for Boeing Co. and Airbus SE, rejected a buyout offer from Texas-based Lone Star Funds last month. David Squires, Senior’s CEO, said Monday that while the bid “fundamentally undervalued” the company, it’s still open to approaches.
The government examined the first Cobham deal and said it will do so with the Ultra proposal. The U.K. said it’s “closely monitoring” the proposed Meggitt takeover. Business Secretary Kwasi Kwarteng is taking an active interest in the deal and may seek more reassurances on preserving jobs, Bloomberg News reported.
U.K. Commitments
Parker-Hannifin promised to continue supplying the U.K. government, and maintain technology and manufacturing in the country. A majority of Meggitt’s board will remain British.
Williams said that he’d protect a significant proportion of Meggitt jobs and will seek to grow the business, not break it up.
“That’s not at all our strategy,” Williams said in the interview. “We like the entirety of this business and we intend to own it for a very long time.”
On a conference call, the CEO said the pledge to increase U.K. research and development spending is valid for five years, while the other commitments last for 12 months.
Parker-Hannifin, founded in 1917, has a significant U.K. presence, providing hydraulics and pneumatics for aerospace, automotive and heavy industry customers. It is already a defense supplier to the U.K. government.
What Bloomberg Intelligence says:
“The 70% takeover premium and aggressive valuation of Meggitt at 17x 2022 Ebitda, excluding synergies, makes a competing bid unlikely. Meggitt’s leadership roles in high-margin controls and components, and sole-source supplier positions, are attractive opportunities in aerospace.”– Douglas Rothacker, BI aerospace industry analyst
The U.S. company said one attraction was a business transformation of Meggitt over the past four years. Another benefit is Meggitt’s more advanced technology in areas including braking systems, advanced sensors and thermal management, Williams said.
Meggitt’s origins go back to 1852, according to its website, under Negretti & Zambra, a scientific instrumentation business which invented the world’s first altimeter for the hot air balloon.
Meggitt has been the subject of recent takeover speculation, including a potential deal with U.S.-based Woodward Inc. and a Times of London report on an approach by a mystery bidder.
(Updates shares in eight paragraph, adds U.K. comment in 11th paragraph, adds BI quote box)
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