December 27, 2013

Textron CEO sees opportunities in Beechcraft acquisition

Textron’s purchase of Wichita’s Beechcraft Corp. is an excellent fit for the company that owns Cessna Aircraft, but it will require “restructuring and optimization of costs,” Textron’s top executive said.

Textron’s purchase of Wichita’s Beechcraft Corp. is an excellent fit for the company that owns Cessna Aircraft, but it will require “restructuring and optimization of costs,” Textron’s top executive said.

“Clearly, we need to take actions necessary to make Cessna and Beechcraft profitable and healthy businesses,” Scott Donnelly, Textron CEO, said Friday in an interview with The Eagle.

That includes continuing to invest in the companies’ product lines and service businesses as well as restructuring, Donnelly said. The restructuring will likely include some job cuts, he said.

“I would expect that,” Donnelly said.

“We’ll have to look at the general and administrative costs” and how to manage two global service networks, he said. Beechcraft and Cessna are two major aviation businesses with a full structure of general and administrative functions.

“And we’ll need to rationalize that,” Donnelly said.

Decisions will be made over time.

“It’s too early to say anything definitive,” he said. “We have a lot of work to do.”

Textron and Beechcraft announced Thursday night that Textron would buy Beechcraft for $1.4 billion, and on Friday, Donnelly fielded questions about what the acquisition might mean for employees of Beechcraft and Cessna, and for the city of Wichita.

Besides employment, a variety of issues must be worked through, Donnelly said, such as whether Beechcraft will operate as a division of Cessna or as a stand-alone company. Also up for review are production sites, management and what costs will be targeted for reductions or elimination.

Beechcraft CEO Bill Boisture, Cessna CEO Scott Ernest and Donnelly will put together a transition team to “lay out what’s the right way to structure things and the right way to rationalize things,” Donnelly said.

“I appreciate that this will be a big question mark for a lot of employees,” he said.

Long-term, the acquisition will be good for Wichita, Donnelly said.

“There’s a long, long history here with Cessna and Beechcraft,” he said.

Clyde Cessna and Walter Beech were partners in Travel Air during the 1920s.

“These guys started together, and they’re back together,” Donnelly said.

The merger “provides a very comprehensive line of products and services that are all based in Wichita, Kansas,” Donnelly said. “I think it’s good for Wichita, and it’s good for our customers.”

The City of Wichita said in a release that the transaction is of great interest to the city.

“Our city’s reputation as the Air Capital of the World has been built on the solid business decisions of our aviation industry,” according to a joint statement by Mayor Carl Brewer and members of the City Council. “We fully expect that the Textron/Beechcraft merger will result in a positive outcome for the individual businesses and the community as a whole.”

Textron has had its eye on Beechcraft for several months. Beechcraft had revived a sale process a year after a deal to sell to Superior Aviation Beijing Co. in China – during Beechcraft’s bankruptcy restructuring – fell apart.

“We always felt it was a great lineup in terms of products,” Donnelly said. “The King Air is a great product and a terrific brand.”

The King Air complements Cessna’s Caravan and Citation jet products, officials said.

Textron also has an interest in expanding into the military marketplace. The potential for Beechcraft’s AT-6, the attack version of its military trainer “is very good,” Donnelly said.

Terms of the deal

Under the terms announced Thursday, Textron is to acquire Wichita’s Beech Holdings, the parent company of Beechcraft, for approximately $1.4 billion. The transaction is expected to close in the first half of 2014 subject to regulatory approvals.

The majority of Beechcraft’s investors who hold enough equity to vote have approved the deal, the company said.

To close the transaction, Textron intends to finance up to $1.1 billion of new debt, including a five-year bank loan, and use available cash.

The acquisition is a clear example of Textron’s commitment to business and general aviation, Cessna president and CEO Scott Ernest said in a statement.

“It represents an exciting opportunity to more broadly serve aviation customers,” Ernest said. “We believe that leveraging each company’s facilities and employee teams creates an even stronger value proposition for customers, giving them additional reasons to own aircraft within the Textron family.”

The sale to Textron for $1.4 billion is a fair price, given growth prospects and expected gains from operational, sales and marketing synergies as it optimizes costs, Textron officials said.

“I think it will provide a lot of opportunity,” Donnelly told analysts on a conference call Friday.

Hawker Beechcraft filed for Chapter 11 bankruptcy in May 2012, as it struggled with the downturn in the aviation market and its debt load from a sale to Goldman Sachs and Onex Corp. in 2007. The company emerged as the smaller Beechcraft Corp. in February.

The company is reportedly controlled by former creditors Centerbridge Partners, Sankaty Advisors and Angelo, Gordon & Co.

Beechcraft employees

Beechcraft, founded by Walter and Olive Ann Beech as Beech Aircraft in 1932, manufactures business, special mission, light attack and trainer aircraft, and operates a global network of service centers.

It employs 5,000, including 3,500 in Wichita.

Donnelly acknowledged during a conference call with analysts that Beechcraft employees have survived some tough, challenging years.

“From an employee’s perspective, obviously we are going to need to go through restructuring and optimization of costs, but it’s going to strengthen those King Air and T-6 and Baron and Bonanza products going forward,” Donnelly said.

Beechcraft retirees should see no change, Donnelly said in the interview. There had been changes in their pension plans during the bankruptcy.

“I don’t expect there to be any further change in respect to that,” he said.

Machinists union District 70 president Frank Molina said, in the long run, the acquisition will be positive.

“It’s going to be in everybody’s best interest,” Molina said, because of the extended product line and the stability the change will bring.

The Machinists union represents hourly workers at Beechcraft and Cessna in separate bargaining units. As of now, Molina does not expect those units to merge.

He expects there will be job reductions because of an overlap in functions of the two companies. But he expects reductions would come from the salaried work force and not from the hourly ranks.

In fact, “our hope is that we bring some of that outsourced work back into Wichita,” Molina said.

Lineup of products

Cessna and Beechcraft have complementary product lines with Cessna focused on business jets and Beech focused on turboprops and piston aircraft, Cowen and Co. analyst Cai von Rumohr wrote in a report to clients last week after the Financial Times reported that a deal between the two companies was close.

“Terrific product fit,” von Rumohr wrote.

For Textron, the acquisition provides lots of potential synergies, he wrote.

“Both are located in Wichita, offering meaningful potential manufacturing and engineering cost synergies,” von Rumohr wrote.

Beechcraft’s worldwide fleet of more than 7,000 King Airs and 25,000 Barons and Bonanzas offers a sizable annual revenue in its service business, von Rumohr wrote.

Beechcraft estimates that its 2013 revenue will total about $1.8 billion, with its business and general aviation business making up 53 percent of that figure. Its global support business is expected to bring 31 percent of the revenue, with its defense company adding about 16 percent.

The bankruptcy also held some customers back from placing orders for King Airs, Donnelly said. With that behind it, Beechcraft’s King Air business has “rebounded nicely” as has customers’ confidence in the company.

Cessna will benefit from Beechcraft customers who want to upgrade to a jet, he said. Because Beechcraft exited its Hawker jet business, that will help Citation sales.

Textron’s purchase includes the Hawker 4000 and Premier IA type certificates along with Plant 3, its composite manufacturing plant.

Beechcraft officials had decided that building large, composite fuselages for Hawker 4000 and Premier jets was not in its plan. Textron does not plan to return to jet production in its Beechcraft business, Donnelly said.

Beechcraft will continue to service and support the aircraft, however.

Beechcraft operates a parts and distribution business with aircraft spare parts distribution and about 90 authorized service centers. It also operates factory-owned service centers that perform maintenance, repair and overhaul services and retrofit and upgrades.

Building defense

Beechcraft also offers its new owner Beechcraft Defense Co., which builds T-6 turboprop military trainers and offers an AT-6 attack version of the plane.

The T-6 turboprop military trainer business should help Textron sell the new Scorpion light attack jet, designed and built inside a Cessna facility in east Wichita by Textron AirLand.

Beechcraft has developed great relationships with customers around the world for the T-6 turboprop, Donnelly said. From a marketing and sales perspective, that will help the company sell both the T-6 and the Scorpion.

Revenue from deliveries of Beechcraft’s T-6 military trainers has declined as the Joint Primary Aircraft Training System, a U.S. procurement program for trainers for the Air Force and Navy, winds down. Deliveries will continue into 2016, but at lower rates.

“There are lots of foreign opportunities,” for the trainer, Donnelly told analysts. “But those haven’t materialized yet. I think they will.”

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