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Woodward Inks All-Stock $6.4 Billion Merger Deal With Hexcel

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Woodward, Inc. (WWD - Free Report) recently announced that it has inked a deal to merge with Hexcel Corporation (HXL - Free Report) for a whopping valuation of $6.4 billion, which reflects 4.5% premium from Hexcel’s last-traded price closing at $72.91 on Jan 10. This all-stock merger of equals comes as a relief to aircraft component suppliers that suffered setbacks with the halted production of The Boeing Company’s (BA - Free Report) 737 MAX.

Stamford, CT-based Hexcel Corporation is an aerospace and defense equipment manufacturer that designs and develops structural materials like carbon fiber used in military and commercial aircraft, space and other industrial applications. Backed by healthy business fundamentals, this second-largest customer of Boeing markets its products through a wide chain of independent distributors across America, Africa, Russia, Europe and the Asia Pacific.

Per the deal, Hexcel shareholders will be entitled to receive 0.625 share of Woodward stock for every share they own whereas Woodward investors will continue to possess the same number of shares as they owned before the transaction. While Hexcel shareholders will own 45% of the combined entity dubbed Woodward Hexcel, that of Woodward will have an ownership stake of 55%.

Generating revenue and cost synergies, Woodward Hexcel is anticipated to generate $1.1 billion EBITDA on net revenues of nearly $5.3 billion for the fiscal year 2019, thereby marking this deal as one of the largest wins in the history of aerospace industry in terms of revenues. Contingent on certain regulatory and shareholder approvals, this much-awaited transaction is expected to close in the third quarter of 2020.

Notably, Woodward Hexcel is projected to generate nearly $1 billion of free cash flow. Supported by a stable capital allocation strategy, the merged entity intends to spend more than $250 million for enhancing its R&D capabilities to sustain new-age solutions in energy-efficiency space and aerodynamics. In addition, the company plans to execute a $1.5-billion worth share repurchase program within 18 months of the merger completion.

Upon its closure, the tax-exempted merger is anticipated to upgrade the overall financial health of both companies with a perfect combination of growth trajectories, complementary cultures and scalability in operational activities. With total 16,000 employees across 14 countries, the amalgamated entity is expected to accelerate technological innovations and tap significant sourcing opportunities with a diversified portfolio of industrial products in a bid to augment customer relationships. The transaction is likely to fuel Woodward’s growth with a positive cash flow, reflecting brighter prospects in the near future.

Woodward is investing heavily in technologies, new manufacturing units and automation equipment to perk up operating performance as it aims to speed up production. Its strategic plan to become a systems integrator increased contract flow substantially, enabling it to capture a larger market share in the wide-body commercial aircraft field.

Driven by healthy global passenger and cargo growth, the Aerospace segment is expected to deliver a strong performance in 2020. In the Industrial markets, while the industrial turbine arena remains uncertain, the company is witnessing robust growth in distributed power for data center applications. Riding high on a bullish outlook for 2020, Woodward is well-positioned to capitalize on its near-term production ramp-up along with opportunities galore.

Woodward has a long-term earnings growth rate of 13.1%. Boosted by the diligent execution of its core operations, the stock has rallied 61% compared with the industry’s rise of 31.8% in the past year.

Woodward currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the broader industry is Itron, Inc. (ITRI - Free Report) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Itron has a long-term earnings expectation of 25%.

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