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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Parker-Hannifin/Meggitt: Agreed 71% Takeover Premium

Event-Driven

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