European Event-Driven Analyst

Jesus Rodriguez Aguilar

Jesús is an Insight Provider (Event-driven) on the Smartkarma network, where he looks across sectors at opportunities arising from securities mispricing (both credit and equity), share classes, bid announcements, prospective bids, and special situations. He has served as Economic and Business Advisor at the Spanish Congress in Madrid. Prior to that, he has worked in the City of London: as a Credit Analyst at Bloomberg; Event-driven associate at former boutique European Research; and doubled as Special Situations and Equity-linked VP (convertible bonds) at Merrill Lynch. Jesús has an MBA from the London Business School, a BA (Hons.) degree in Economics from the Complutense University in Madrid, and a BA (Hons.) in Law from U.N.E.D., also in Madrid.

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Event-Driven

<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