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Rockwell Collins (COL) to Purchase B/E Aerospace for $8.3B

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Rockwell Collins Inc. has entered into a definitive agreement to acquire B/E Aerospace Inc. . The transaction is expected to close in 2017, subject to the approval of both the companies’ shareholders, regulatory approvals and other customary conditions.

Purchase Consideration

Per the agreement, Rockwell Collins will pay around $6.4 billion in cash and stock, in addition to the assumption of $1.9 billion in net debt.

Each shareholder of B/E Aerospace will get total consideration of $62.00 per share, which includes $34.10 in cash and $27.90 in shares of Rockwell Collins’ common stock, subject to a 7.5% collar. This translates into a premium of 22.5% on the closing price of B/E Aerospace’s common stock on Oct 21, 2016.

Once completed, existing B/E Aerospace shareholders will hold approximately 20% of the merged company.

Benefits of the Acquisition

The acquisition will combine Rockwell Collins’ capabilities in flight deck avionics, cabin electronics, mission communications, simulation and training, and information management systems with B/E Aerospace's array of cabin interior products which comprise seating, food and beverage preparation, and storage equipment, lighting and oxygen systems, and modular galley and lavatory systems for commercial airliners and business jets.

The acquisition will increase the sales of Rockwell Collins’ equipment in the bigger two-aisle planes of The Boeing Co. (BA - Free Report) and Airbus Group SE (EADSY - Free Report) that fly international routes, to almost three times. It is also expected to double the value of the systems that it sells for new single-aisle planes manufactured by the two aircraft behemoths.

The transaction will result in an improvement in Rockwell Collins products and expand its product portfolio, customer mix and geographic presence. It is expected to generate run-rate pre-tax cost synergy of roughly $125 million after tax.

Post-Acquisition Scenario

Upon completion, Rockwell Collins is projected to maintain a strong investment grade credit rating with net debt of around $7.5 billion. The company has plans to maintain its current dividend policy too. By the end of fiscal 2019, Rockwell Collins aims to pay down $1.5 billion of the new debt, while restricting its share repurchase program to lower dilution.

In the first fiscal year, it is expected to provide double-digit accretion to the company’s earnings. The combined five-year free cash flow generation is expected to exceed $6 billion.

Rockwell Collins’ Take on the Merger

According to Kelly Ortberg, Chairman, President and Chief Executive Officer of Rockwell Collins, the transaction will facilitate the combination of two complementary product lines. Moreover, the acquisition is in sync with management’s strategy “to accelerate growth and build value through market-leading positions in cockpit and cabin solutions”. This will help the company provide better services to the commercial aviation, business jet and military customers through a broader line of offerings.

Zacks Rank

Rockwell Collins currently has a Zacks Rank #4 (Sell), while B/E Aerospace has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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