By Pierre Caye (McGill University), Jonathan Lui, Erica Chan, Hunter Pang, Lasheeka Ramesh (London School of Economics)
Photo: Thomas Bormans (Unsplash)
Overview of the deal
Acquirer: Boeing
Target: Spirit AeroSystems
Implied Equity Value: $4.7bn
Total Transaction Size: $8.3bn
Closed date: N/A
Target advisor: Morgan Stanley, Moelis & Company (financial), Skadden, Arps, Slate, Meagher & Flom (legal)
Acquirer advisor: PJT Partners, Goldman Sachs, Consello (financial), Sullivan & Cromwell (legal)
On July 1, 2024, Boeing announced its agreement to acquire Spirit AeroSystems in an all-stock transaction valued at approximately $8.3 billion, including Spirit's net debt. The deal offers Spirit shareholders $37.25 per share in Boeing common stock, representing a 30% premium over Spirit's closing price on February 29, 2024.
In addition to the merger with Boeing, Spirit has entered a binding term sheet with Airbus to negotiate the sale of certain Spirit assets that serve Airbus programs. As part of this acquisition, Spirit plans to divest operations in Malaysia, Scotland, and Northern Ireland (non-Airbus operations).
The closing of the merger is contingent upon several conditions, including regulatory approvals, approval from Spirit shareholders, and the completion of the Airbus asset divestiture. The transaction is expected to close in mid-2025. Boeing CEO Dave Calhoun emphasised that the acquisition would enable better alignment of commercial production systems, safety, and quality management between the two companies. This strategic move aims to address production challenges and stabilise Boeing's supply chain, particularly in light of recent quality and manufacturing issues faced by both companies.
"We believe this deal is in the best interest of the flying public, our airline customers, the employees of Spirit and Boeing, our shareholders and the country more broadly," said Boeing President and CEO Dave Calhoun. "By reintegrating Spirit, we can fully align our commercial production systems, including our Safety and Quality Management Systems, and our workforce to the same priorities, incentives and outcomes – centred on safety and quality."
Company Details (Acquirer - Boeing)
Boeing is an American multinational corporation that designs, manufactures, and sells aeroplanes, rotorcraft, rockets, satellites, telecommunications equipment, and missiles worldwide. The company also provides leasing and product support services. Founded by William Boeing, Boeing has grown to become one of the largest aerospace manufacturers and defence contractors in the world. Its major divisions include Boeing Commercial Airplanes (BCA), Boeing Defense, Space & Security (BDS), and Boeing Global Services. Known for iconic aircraft such as the 747 jumbo jet and the 787 Dreamliner, Boeing plays a critical role in global aviation and space exploration.
Founded in 1916 in Seattle, Washington, United States. Headquartered in Arlington County, Virginia, United States.
CEO: Dave Calhoun
Number of employees: 170 000
Market Cap: $113.47B (as of 18/07/2024)
EV: $153.88B
LTM Revenue: $76.4B
LTM EBITDA: $2.3M
LTM EV/Revenue: 2x
LTM EV/EBITDA: 65x
Recent Transactions: American Battle Monuments Foundation Stake Purchase (2022), ForeFlight Acquisition (2019).
Company Details (Target - Spirit AeroSystems.)
Spirit AeroSystems is a leading global manufacturer of aerostructures for commercial, military, and business/regional jets. The company was formed from the sale of Boeing's commercial aeroplane manufacturing operations. Spirit specialises in the design and fabrication of major aerostructures, including fuselages, pylons, nacelles, and wing components. It supplies these components to major aerospace companies such as Boeing and Airbus. The company's extensive facilities and innovative manufacturing techniques enable it to produce complex aerostructures at scale, playing a crucial role in the aerospace supply chain.
Founded in 2005, and headquartered in Wichita, Kansas.
CEO: Patrick M. Shanahan
Number of employees: 14800
Market Cap: $4.16B (as of 18/07/2024)
EV: $7.97B
LTM Revenue: $6.3B
LTM EBITDA: $-0.27M
LTM EV/Revenue: 1.6x
Projections and Assumptions
Short-term consequences
The acquisition of spirit aerosystems by Boeing is poised to have several immediate effects within the aerospace industry. This merger will likely lead to a short term disruption as both companies will have to work together to integrate their operations. This integration process could temporarily slow production and lead to logistical challenges, and thus, impacting Boeing’s delivery schedules for commercial and defence products. Moreover, the deal’s dependence on regulatory approvals and shareholder consent introduces uncertainty and any delays or obstacles in obtaining these approvals could postpone anticipated benefits of the acquisition, which affects market confidence.
In addition, Boeing will need to manage the financial implications of the all-stock transaction. Although the deal aims to enhance Boeing’s market position, the dilution of shares might initially concern investors. The 30% premium paid to Spirit’s shareholders is attractive, however will also increase Boeing’s financial commitments which may lead to short term volatility in Boeing’s stock price as the market reacts to the new financial landscape.
On the operational front the divestiture of certain Spirit assets adds another layer of complexity. While this move is strategic for focusing Boeing’s resources, it requires careful execution to avoid disruptions in supply chains and maintain relationships with key stakeholders. There is also a need to ensure a smooth transition of divested operations, which might temporarily divert management’s focus from core activities.
The integration process may also cause uncertainties in the workforce domain, among the employees of both companies. Boeing will need to address potential concerts regarding job security and cultural alignment to maintain morale and productivity during the transition period. By focusing on clear communication and effective change management strategies, Boeing can mitigate some of these short-term disruptions for a more seamless integration.
Long-term Upsides
The long-term benefits of Boeing's acquisition of Spirit AeroSystems’ operations include improved earnings potential through increased product offerings and improved safety and quality systems. The acquisition reduces Boeing's reliance on outsourcing critical component manufacturing, aligning its commercial production systems. This alignment is crucial for quality management and safety, especially following recent incidents, which underscores the importance of managing global supply chains to prevent hazards and enhance the company’s reputation. Boeing aims to enforce stricter quality control standards, such as maintaining a regulatory cap of 38 planes per month to maintain high safety standards. Consequently, it will reduce potential regulatory fines, as well as unlock additional revenue streams to boost Boeing's stock performance.
Globally, the airplane industry is poised for growth as air travel fully recovers and surpasses pre-pandemic demand. Boeing forecasts a 3% increase in airplane deliveries over the next 20 years, with nearly 44,000 new commercial airplanes needed by 2043. Rising consumer demand for travel, aviation development in emerging markets, and the growth of supply chains and e-commerce are driving air cargo demand. After the pandemic, air traffic growth has returned to Boeing’s long-term trend, with passenger air traffic projected to rise by 4.7% annually over the next two decades. Airlines are optimising fleets and productivity to remain competitive, making this acquisition vital for Boeing to keep pace with its rivals.
Risks and Uncertainties
The merger of Boeing and Spirit AeroSystems brings together two companies grappling with significant hurdles. Boeing, once a behemoth in the aerospace industry, has faced a steep decline in reputation following the catastrophic failures of the 737 MAX. These tragedies exposed deep-rooted issues within the company, including flaws in design, testing, and certification processes. Beyond the MAX, Boeing has contended with quality control problems across its product line and intense regulatory scrutiny. These challenges have eroded public trust and inflicted substantial financial losses.
Spirit AeroSystems has also encountered its share of difficulties. Quality control lapses at Spirit have contributed directly to the challenges faced by Boeing, including a high-profile fuselage panel blowout on a 737 MAX in January this year. These issues have impacted the company's financial performance and reputation.
The convergence of the two troubled companies thus raises questions on the risks of the combined entity. Boeing will need to integrate Spirit’s large number of employees into its processes, and ensure that the quality and safety issues do not occur again for both entities. With $4.3 billion of debt due in 2025, and a further $8 billion in 2026, Boeing will need to find ways to generate enough cash flows to repay this debt and avoid a further credit downgrade. In general, with the uncertainties surrounding Boeing, like management changes and lawsuits, the acquisition of Spirit is a step to the right direction, but the synergies may take longer to realise.