European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

On October 28, <a href="https://www.smartkarma.com/entities/meggitt-plc" target="_blank" data-smartkarma-citation="entities:22044:1" rel="noopener">Meggitt PLC (MGGT LN)</a> published Q3 trading update and downgraded guidance for FY 2021: it expects FY 2021 organic revenue to be 5% below FY 2020 on an organic basis (FY 2020 revenue was £1.68 billion), due to supply chain disruption and softer defence trends. Meggitt added that it expects underlying operating profit of between £170 million and £190 million (vs. £192 million in FY 2020).
The UK government ordered a probe into the takeover offer on national security grounds. The CMA is required to investigate the proposed transaction and report to the Secretary of State by March 18, 2022. Meggitt looks forward to engaging constructively with the CMA on its review. In mid-August, the Secretary of State ordered a similar probe into the takeover of <a href="https://www.smartkarma.com/entities/ultra-electronics-holdings-plc" target="_blank" data-smartkarma-citation="entities:22196:1" rel="noopener">Ultra Electronics Holdings (ULE LN)</a> by Cobham, and gave the CMA until January 18, 2022 to investigate the proposed deal.
<a href="https://www.smartkarma.com/entities/parker-hannifin-corp" target="_blank" data-smartkarma-citation="entities:6289:1" rel="noopener">Parker Hannifin (PH US)</a> is an industrial buyer, and does not intend to dismantle Meggitt as it has happened with Cobham (Cobham was quickly dismantled after the takeover by Advent).
Boris is seeking allies beyond the EU, so I do not think the UK Government will block a deal from an American company with committed financing. Rather the Government will ask for guarantees that jobs/technology/manufacturing stay within the UK. With committed deal financing and almost sure green light from the UK Government, there are high chances that this deal will complete.
Meggitt currently trades at 18.8x EV/Fwd EBITDA (vs. the 10.3x median of comparables, source: Capital IQ consensus) and 3.4% FCF yield reflecting the bid premium. The spread is relentlessly tightening.
Gross spread is 6.2% for a deal that can take up to a year to close (and quite possibly 6-9 months). Recommendation is long MGGT LN, TP is 800p as per the Parker-Hannifin offer.

On October 28, Meggitt PLC (MGGT LN) published Q3 trading update and downgraded guidance for FY 2021: it expects FY 2021 organic revenue to be 5% below FY 2020 on an organic basis (FY 2020 revenue was £1.68 billion), due to supply chain disruption and softer defence trends. Meggitt added that it expects underlying operating profit of between £170 million and £190 million (vs. £192 million in FY 2020).
The UK government ordered a probe into the takeover offer on national security grounds. The CMA is required to investigate the proposed transaction and report to the Secretary of State by March 18, 2022. Meggitt looks forward to engaging constructively with the CMA on its review. In mid-August, the Secretary of State ordered a similar probe into the takeover of Ultra Electronics Holdings (ULE LN) by Cobham, and gave the CMA until January 18, 2022 to investigate the proposed deal.
Parker Hannifin (PH US) is an industrial buyer, and does not intend to dismantle Meggitt as it has happened with Cobham (Cobham was quickly dismantled after the takeover by Advent).
Boris is seeking allies beyond the EU, so I do not think the UK Government will block a deal from an American company with committed financing. Rather the Government will ask for guarantees that jobs/technology/manufacturing stay within the UK. With committed deal financing and almost sure green light from the UK Government, there are high chances that this deal will complete.
Meggitt currently trades at 18.8x EV/Fwd EBITDA (vs. the 10.3x median of comparables, source: Capital IQ consensus) and 3.4% FCF yield reflecting the bid premium. The spread is relentlessly tightening.
Gross spread is 6.2% for a deal that can take up to a year to close (and quite possibly 6-9 months). Recommendation is long MGGT LN, TP is 800p as per the Parker-Hannifin offer.

Parker-Hannifin/Meggitt: Update and Spread

On 11 August, <a href="https://www.smartkarma.com/entities/meggitt-plc" target="_blank" data-smartkarma-citation="entities:22044:1" rel="noopener">Meggitt PLC (MGGT LN)</a> said it received an unsolicited, preliminary and non-binding c. £7.1 bn cash takeover proposal, 900p/share, from <a href="https://www.smartkarma.com/entities/transdigm-group-inc" target="_blank" data-smartkarma-citation="entities:2592:1" rel="noopener">Transdigm Group (TDG US)</a>, thus trumping the £6.3 billion agreed and recommended takeover offer from <a href="https://www.smartkarma.com/entities/parker-hannifin-corp" target="_blank" data-smartkarma-citation="entities:6289:1" rel="noopener">Parker Hannifin (PH US)</a>. TransDigm also mentioned the possibility to change the composition of any offer (it could be cash and shares).
Meggitt said it is reviewing the proposal from TransDigm and has provided it with due diligence access. Meggitt stated it plans to carefully consider the terms of any offer and TransDigm's plans for the company, including any impact on employees, stakeholders and customers. It said that there is no certainty any firm offer will be made. 
Nevertheless, Meggitt added that it continues to recommend Parker's 800p/share cash offer, agreed on 2 August. 
<ul>
<li>"The board of Meggitt believes Parker's offer continues to represent an attractive proposition for Meggitt's shareholders and for its broader stakeholders".</li>
<li>Meggitt said that it will be seeking an order giving it permission to convene a shareholder meeting for considering and approving the scheme to implement the acquisition by Parker.</li>
<li>The Times reported that the chairman of Meggitt, Nigel Rudd, has separately called on the UK to block any takeover by bidders who fail to offer binding commitments on investment and jobs.</li>
<li>Meggitt announced on a6 August that it had published documents in relation to the offer, with a date set for a shareholder vote on 21 September.</li>
</ul>
The Takeover Panel has given TransDigm a put up or shut up deadline by which it must make a firm intention to make a formal offer to back up its provisional 900p/share approach by 14 September. The Panel also said that this deadline would cease to apply if a third party other than TransDigm makes a firm offer for Meggitt.
<div>
As a reminder, Parker Hannifin announced the purchase of Meggitt for £6.3 bn, and has pledged with the British Government to maintain employment to avoid potential regulatory problems. The cash offering of 800p/share is a 71% premium over Meggitt's closing on 30 July, for an implied equity value of £6,308.4 mn and implied EV of £7,131 mn and 23.4x EV/21e EBITDA and 44.4x P/21e E (source: Capital IQ consensus). Cost synergies are expected to reach $300 mn.
The main issue with a potential offer from TransDigm is its leverage (8.5x net debt/EBITDA, and 1.5x EBIT/interest, with some of its latest issued bonds trading at 5.19% YTW and rated B- by S&amp;P). If successful in the pursuit of Meggitt, net debt would increase to c. $25 bn and debt issued at an offering yield north of 5.5%, which is why shares could be offered as part of the consideration.
PH's management expects to achieve cost synergies of $300 million (approximately 10% of sales) by the end of the third year at a cost of $240 million. Considering performance of Meggitt in FY2023 comes closer to that of FY2019 (EBITDA of £493 mn in FY 2019 vs. Capital IQ 2023e EBITDA consensus estimates of £461 mn). Using Capital IQ consensus figures and assuming an incremental contribution of $4.3/share to TransDigm, EPS would increase by 17% by FY2024.
Recommendation is maintain long Meggitt, TP 900p. Shares of Meggitt closed at 838.8p on 20 August. Gross (and mostly likely annualised) spread to potential offer is 6.8%. Upside could come from new suitors. There is potential downside risk in case TransDigm's offer does not materialize, although I do not believe the company is bluffing.
</div>

On 11 August, Meggitt PLC (MGGT LN) said it received an unsolicited, preliminary and non-binding c. £7.1 bn cash takeover proposal, 900p/share, from Transdigm Group (TDG US), thus trumping the £6.3 billion agreed and recommended takeover offer from Parker Hannifin (PH US). TransDigm also mentioned the possibility to change the composition of any offer (it could be cash and shares).
Meggitt said it is reviewing the proposal from TransDigm and has provided it with due diligence access. Meggitt stated it plans to carefully consider the terms of any offer and TransDigm's plans for the company, including any impact on employees, stakeholders and customers. It said that there is no certainty any firm offer will be made. 
Nevertheless, Meggitt added that it continues to recommend Parker's 800p/share cash offer, agreed on 2 August. 

"The board of Meggitt believes Parker's offer continues to represent an attractive proposition for Meggitt's shareholders and for its broader stakeholders".
Meggitt said that it will be seeking an order giving it permission to convene a shareholder meeting for considering and approving the scheme to implement the acquisition by Parker.
The Times reported that the chairman of Meggitt, Nigel Rudd, has separately called on the UK to block any takeover by bidders who fail to offer binding commitments on investment and jobs.
Meggitt announced on a6 August that it had published documents in relation to the offer, with a date set for a shareholder vote on 21 September.

The Takeover Panel has given TransDigm a put up or shut up deadline by which it must make a firm intention to make a formal offer to back up its provisional 900p/share approach by 14 September. The Panel also said that this deadline would cease to apply if a third party other than TransDigm makes a firm offer for Meggitt.

As a reminder, Parker Hannifin announced the purchase of Meggitt for £6.3 bn, and has pledged with the British Government to maintain employment to avoid potential regulatory problems. The cash offering of 800p/share is a 71% premium over Meggitt's closing on 30 July, for an implied equity value of £6,308.4 mn and implied EV of £7,131 mn and 23.4x EV/21e EBITDA and 44.4x P/21e E (source: Capital IQ consensus). Cost synergies are expected to reach $300 mn.
The main issue with a potential offer from TransDigm is its leverage (8.5x net debt/EBITDA, and 1.5x EBIT/interest, with some of its latest issued bonds trading at 5.19% YTW and rated B- by S&amp;P). If successful in the pursuit of Meggitt, net debt would increase to c. $25 bn and debt issued at an offering yield north of 5.5%, which is why shares could be offered as part of the consideration.
PH's management expects to achieve cost synergies of $300 million (approximately 10% of sales) by the end of the third year at a cost of $240 million. Considering performance of Meggitt in FY2023 comes closer to that of FY2019 (EBITDA of £493 mn in FY 2019 vs. Capital IQ 2023e EBITDA consensus estimates of £461 mn). Using Capital IQ consensus figures and assuming an incremental contribution of $4.3/share to TransDigm, EPS would increase by 17% by FY2024.
Recommendation is maintain long Meggitt, TP 900p. Shares of Meggitt closed at 838.8p on 20 August. Gross (and mostly likely annualised) spread to potential offer is 6.8%. Upside could come from new suitors. There is potential downside risk in case TransDigm's offer does not materialize, although I do not believe the company is bluffing.


TransDigm/Meggitt: Unsolicited Potential 900p Offer

<a href="https://www.smartkarma.com/entities/parker-hannifin-corp" target="_blank" data-smartkarma-citation="entities:6289:1" rel="noopener">Parker Hannifin (PH US)</a>, an American engineering group, has announced the purchase of the British aeronautical and defense systems and components company <a href="https://www.smartkarma.com/entities/meggitt-plc" target="_blank" data-smartkarma-citation="entities:22044:1" rel="noopener">Meggitt PLC (MGGT LN)</a> for £6.3 bn, and has pledged with the British Government to maintain employment to avoid potential regulatory problems. The cash offering of 800p/share is a 71% premium over Meggitt's closing on 30 July, for an implied equity value of £6,308.4 mn and implied EV of £7,131 mn and 23.4x EV/Fwd EBITDA and 44.4x Fwd P/E (source: Capital IQ consensus).
The British Government said it will study the operation carefully as it is a company in a strategic sector.
This acquisition will nearly double the size of the Aerospace Systems segment of the combined company, with highly complementary technologies. It is also well positioned on premier programs with key customers. 70% sole sourced with reparatory products, expand system and component capabilities (recurring revenue), add 500 basis points to aftermarket mix. The acquisition should position the combined company for growth potential with the combination of the aerospace, commercial recovery with estimated synergies of $300 mn by year 3, leading to a c. 30% EBITDA.
My estimate of fair value (comps based blended average of EV/Fwd EBITDA and Fwd P/E) is 499p. Therefore the offer price represents a compelling 60% upside to fair value, in my view.
The shares are trading at 2.2% FCF 21e yield, which raises to 4.5% 22e FCF yield thus reflecting recovery (Capital IQ consensus) and a gross spread of 8.4% to the offer price (also annualized, considering 12 months to completion). The deal should conclude, in my view, due to the 71% premium offered.  Obtaining all clearances together with shareholder approval should take nearly a year and there should be no antitrust risk, given the diversified businesses of both Meggitt and Parker-Hannifin.
Recommendation Long MGGT LN, TP 800p.

Parker Hannifin (PH US), an American engineering group, has announced the purchase of the British aeronautical and defense systems and components company Meggitt PLC (MGGT LN) for £6.3 bn, and has pledged with the British Government to maintain employment to avoid potential regulatory problems. The cash offering of 800p/share is a 71% premium over Meggitt's closing on 30 July, for an implied equity value of £6,308.4 mn and implied EV of £7,131 mn and 23.4x EV/Fwd EBITDA and 44.4x Fwd P/E (source: Capital IQ consensus).
The British Government said it will study the operation carefully as it is a company in a strategic sector.
This acquisition will nearly double the size of the Aerospace Systems segment of the combined company, with highly complementary technologies. It is also well positioned on premier programs with key customers. 70% sole sourced with reparatory products, expand system and component capabilities (recurring revenue), add 500 basis points to aftermarket mix. The acquisition should position the combined company for growth potential with the combination of the aerospace, commercial recovery with estimated synergies of $300 mn by year 3, leading to a c. 30% EBITDA.
My estimate of fair value (comps based blended average of EV/Fwd EBITDA and Fwd P/E) is 499p. Therefore the offer price represents a compelling 60% upside to fair value, in my view.
The shares are trading at 2.2% FCF 21e yield, which raises to 4.5% 22e FCF yield thus reflecting recovery (Capital IQ consensus) and a gross spread of 8.4% to the offer price (also annualized, considering 12 months to completion). The deal should conclude, in my view, due to the 71% premium offered.  Obtaining all clearances together with shareholder approval should take nearly a year and there should be no antitrust risk, given the diversified businesses of both Meggitt and Parker-Hannifin.
Recommendation Long MGGT LN, TP 800p.

Parker-Hannifin/Meggitt: Agreed 71% Takeover Premium

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

In our November Strategy book we summarize the basis for our bullish outlook, discuss the deservedly hot topic of value vs. growth. and highlight actionable opportunities within our Manufacturing, Transportation, Materials, Technology, &amp; Consumer Discretionary Sectors.

In our November Strategy book we summarize the basis for our bullish outlook, discuss the deservedly hot topic of value vs. growth. and highlight actionable opportunities within our Manufacturing, Transportation, Materials, Technology, &amp; Consumer Discretionary Sectors.

Pan-Asia Index Flows & Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Pan-Asia Index Flows & Special Situations

Quiddity Advisors

Pan-Asia Catalysts/Events

On Sunday 12th January, US-based aircraft component suppliers Hexcel Corp and Woodward Inc <a href="https://investors.hexcel.com/investor-news/news-details/2020/Woodward-and-Hexcel-Announce-Merger-of-Equals-to-Create-a-Premier-Integrated-Systems-Provider-Propelling-the-Future-of-Flight-and-Energy-Efficiency/default.aspx" target="_blank" rel="noopener">announced</a> they would combine in a US$6.4Bn all-stock merger of equals to form "a premier integrated systems provider serving the aerospace and industrial sectors".Under the terms of this Offer, Hexcel shareholders will receive 0.625 Woodward shares per Hexcel share. On a fully diluted basis, the existing shareholders of Woodward and Hexcel will own 55% and 45%, respectively, of the combined entity. The deal is conditional on the receipt of antitrust clearance and approvals from the shareholders of both Hexcel and Woodward. The transaction is expected to be completed in the third calendar quarter of 2020.At the time of writing, the Deal is trading close to terms with a view to complete. That obviously includes a high likelihood of deal completion as-is, a small probability of dealbreak, and some probability of a deal bump.

On Sunday 12th January, US-based aircraft component suppliers Hexcel Corp and Woodward Inc announced they would combine in a US$6.4Bn all-stock merger of equals to form "a premier integrated systems provider serving the aerospace and industrial sectors".Under the terms of this Offer, Hexcel shareholders will receive 0.625 Woodward shares per Hexcel share. On a fully diluted basis, the existing shareholders of Woodward and Hexcel will own 55% and 45%, respectively, of the combined entity. The deal is conditional on the receipt of antitrust clearance and approvals from the shareholders of both Hexcel and Woodward. The transaction is expected to be completed in the third calendar quarter of 2020.At the time of writing, the Deal is trading close to terms with a view to complete. That obviously includes a high likelihood of deal completion as-is, a small probability of dealbreak, and some probability of a deal bump.

Hexcel-Woodward: Another Aircraft Supplier Merger

United States

Parker-Hannifin Corporation manufactures motion control products, including fluid power systems, electromechanical controls, and related components.  The Company also produces fluid purification, fluid flow, process instrumentation, air conditioning, refrigeration, and electromagnetic shielding and thermal management products.

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Parker Hannifin (PH US)

Parker-Hannifin/Meggitt: Update and Spread

6.2% gross spread for a deal very likely to complete. TP is 800p. Meggitt currently trades at 18.8x EV/Fwd EBITDA (vs. the 10.3x median of...

Jesus Rodriguez Aguilar

TransDigm/Meggitt: Unsolicited Potential 900p Offer

Meggitt's Board is playing hard-to-get with TransDigm. Acquisition would be accretive but main obstacle is leverage. Maintain long position in MGGT...

Jesus Rodriguez Aguilar

Parker-Hannifin/Meggitt: Agreed 71% Takeover Premium

Shares are trading at 2.2% FCF 21e yield, 4.5% 22e FCF yield thus reflecting recovery. Gross spread to offer is 8.4%. The deal should conclude due...

Jesus Rodriguez Aguilar

U.S. Equity Strategy: Remain Bullish

In our November Strategy book we summarize the basis for our bullish outlook, discuss the deservedly hot topic of value vs. growth. and highlight...

Vermilion Research

Hexcel-Woodward: Another Aircraft Supplier Merger

On Sunday 12th January, US-based aircraft component suppliers Hexcel Corp and Woodward Inc announced they would combine in a US$6.4Bn all-stock...

Janaghan Jeyakumar, CFA

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