Rockwell Collins Prepares to Take Flight With $6.4B B/E Aerospace Deal

 | Oct 24, 2016 | 12:52 PM EDT
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Sometimes a deal is so obviously beneficial for both parties that a merger is hard to pass up. This is the case when it comes to Rockwell Collins'  (COL)   proposed $6.4 billion purchase of B/E Aerospace  (BEAV) , according to Chris Versace, co-portfolio manager of Growth Seeker, which has B/E Aerospace as a holding

The two companies' operations are extremely complementary, with Rockwell Collins focusing mainly on avionics and cockpit engineering, while B/E's business concentrates on outfitting the cabin with upholstery, food and entertainment. 

"This merger is a perfect example of companies putting their balance sheets to work to capture incremental growth opportunities," Versace told Real Money in a phone interview Monday. 

Rockwell's business deals directly with original equipment manufacturers (OEM) such as Boeing  (BA) and Airbus  (EADSY)  and B/E usually deals directly with the airlines. That lack of business overlap makes the probability that regulators will approve the merger high, Rockwell CEO Kelly Ortberg told CNBC in an interview Monday morning. 

As an added benefit, the planned acquistion allows Rockwell to diversify its business and shift further into the growing commercial sector while military spending remains uncertain in an election year. Ortberg acknowledged that there are short-term market pressures even in the commercial sector in an interview with the Wall Street Journal. But consolidation within the industry has helped ease some of those pressures even as OEMs pressure suppliers to lower their prices.

A Rockwell acquisition of B/E couldn't come at a better time for the company, as B/E has been prolific in recent quarters, acquiring contracts to supply about half of the market for coach seats and even more of the market for luxury ones that can cost up to $100,000 per seat, according to the Journal

Both B/E and Rockwell released quarterly earnings results over the weekend. B/E reported earnings of $0.83 per share, topping analyst expectations by $0.03 on revenue that rose nearly 8% to $732.7 million. Meanwhile, Rockwell posted a 13% increase in earnings and revenue advanced 4.4% year over year.

"B/E has been benefiting from growth in the OEM market and the rise of global tourism. That growth has led to the the need for new aircraft as well as upgrades to the older aircraft," Versace said. "And B/E will be right there to benefit from this increased spending."

Rockwell expects the deal to result in about $160 million in cost savings, with about 90% of that amount realized within the first year of the acquisition, which is expected to close next spring. The company plans to realize those synergies through the elimination of corporate redundancies, supply chain savings, consolidation of IT systems, and the leveraging of the two companies' foreign engineering departments. 

At the end of the day airlines will be competing for a growing global middle-class travel industry through amenities, according to Versace. With an acquisition of B/E, Rockwell is positioning itself to take full advantage of the competition in the commercial airline space. 

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