Danaher Downshifting On Defense Business, Analysts Say
January 18 2011 - 2:50PM
Dow Jones News
Danaher Corp.'s (DHR) sale of Pacific Scientific Aerospace
confirms Danaher's long-suspected interest in off-loading its
portfolio of aerospace and defense businesses, analysts said
Tuesday.
Danaher plans to sell Pacific Scientific to U.K.-based Meggitt
PLC (MGGT.LN) for $685 million in cash. Pacific Scientific, which
had revenue of $378 million last year, accounted for an estimated
two-thirds of Danaher's annual revenue from its aerospace and
defense portfolio. Pacific Scientific's product lines include fire
suppression systems, gauges, personal restraints and sensors.
"When you think of aerospace and defense, it's been a non-core
business for Danaher for a long time as they've moved their
portfolio toward asset-light businesses," said Richard Eastman, a
senior analyst for brokerage firm Robert W. Baird & Co. "It's
not a long-term growth market" for Danaher.
The Washington-based industrial conglomerate has been focusing
on a handful of sectors that it views as providing Danaher with an
opportunity to dominate the market. This group of sectors includes,
testing and measurement instruments, life sciences technology,
dental appliances, water treatment and product identification
systems.
Rumors about Danaher having its entire aerospace portfolio on
the block have been circulating for several months. But the company
was widely believed to have taken the segment off the market in
recent months when it couldn't receive its desired price. Danaher
CEO Larry Culp refused to comment on whether the company was trying
to sell its aerospace and defense holdings when asked about it
during the company's annual presentation to investors and analysts
in December.
Danaher did not return calls for comments Tuesday about the deal
with Meggitt. U.S. diversified industrial companies have been
reducing their exposure to defense-related businesses in
anticipation of steep cuts in U.S. defense spending in the coming
years. Last week, ITT Corp. (ITT) announced that it will spin off
its defense business as a separate company to its shareholders by
the end of 2011.
An estimated 57% of Pacific Scientific's annual revenue comes
from commercial aviation, with the remaining 43% coming from
military customers. Pacific Scientific has been a money-maker for
Danaher, contributing about 7 cents to company's earnings per share
for 2010. Meggitt's purchase price represents a multiple of 8.7
times Pacific Scientific's 2010 earnings, according to Baird.
"It's not a bad business at all," said Daniel Holland, an
analyst with research firm Morningstar Inc.
Analysts said its unclear whether the remaining holdings in
Danaher's defense portfolio are for sale. The businesses have
combined annual revenue estimated at $250 million.
The acquisition of Pacific Scientific will broaden Meggitt's
product lines and increase its exposure to major commercial and
military aviation programs, including Boeing Co.'s (BA) 787
Dreamliner, Airbus' A380, A350 and A400M and the Eurocopter
NH-90.
Meggitt Chief Executive Terry Twigger said in a written
statement that the deal "represents a further major step in the
strategic growth and development of the Meggitt Group and fits well
into Meggitt's business model, with strong technology positions, a
significant level of sole source content and aftermarket sales
representing over one-third of Pacific Scientific's total
revenues."
Meggitt said the transaction will be funded in part by the sale
of up to 69.8 million new ordinary shares of Meggitt stock,
representing less than 10% of its current share capital. The
balance of purchase price will be funded from existing debt
facilities.
Meggitt earns roughly 41% of its revenue from the civil
aerospace market, 45% from the military market and the remaining
14% from other markets, primarily energy. Meggitt estimates cost
synergies from Pacific Scientific of about $5 million in 2011,
rising to about $18 million a year by 2014. The one-time cost to
achieve these savings is expected to be about $32 million spread
over three years. Meggitt expects the deal to enhance its earnings
immediately.
Completion of the deal is dependent on regulatory clearances,
including a review by the Committee on Foreign Investment in the
U.S.
Meggitt's shares closed Tuesday's regular trading session on the
London Stock Exchange down 3 pence, or 0.78%, at 368 pence. Danaher
was recently trading up 0.25% at $47.27 a share.
-By Bob Tita, Dow Jones Newswires; 312-750-4129;
robert.tita@dowjones.com
(Jonathan Buck contributed to this report)