Wesco Wrangles $1.9B Takeover

Wesco 2020, a turnaround plan at aerospace parts supplier Wesco Aircraft Holdings Inc., has resulted in a $1.9 billion payday. That’s the amount Platinum Equity Partners in Beverly Hills has agreed as the acquisition price for Wesco in Valencia. Wesco will be combined with Pattonair, a Platinum Equity-owned supply chain management services company based in the United Kingdom. In the acquisition deal, Wesco shareholders will receive $11.05 per share in cash. That amount represents a premium of 27.5 percent over the 90-day volume weighted average share price for the period ended May 24, the last trading day prior to media speculation regarding a potential transaction involving Wesco. The Wesco 2020 plan, announced in the second quarter of last year, worked to enhance services and reduce costs by aligning the company’s footprint with its customer and supply base; refine the organizational structure to drive greater accountability, reduce management layers and eliminate duplication; and invest in automation and other tools for more effective parts inventory management. The plan came after the company reported a full-year loss in 2017. The plan improved performance, and the timing of the acquisition leaves room for questioning if the company’s continued performance in 2020 for both revenue growth and margin expansion would have yielded a higher price. “Assuming a continuation of solid quarterly results and upward estimate revisions, we believe a take-out price in the range of $13 to $15 would have been achievable,” Michael Ciarmoli, an analyst with SunTrust Robinson Humphrey, wrote in a research note on Aug. 9. Ciarmoli isn’t alone. At least nine law firms have announced investigations into the acquisition in an attempt to bring class action lawsuits on behalf of shareholders. Valuable customer base Wesco serves more than 7,000 customers with a global workforce of about 3,000 operating in 17 countries. Customers include commercial and military aircraft manufacturers, including Boeing Co. and Lockheed Martin. In a statement, Louis Samson, a partner at Platinum Equity, said the combination of Wesco and Pattonair creates a truly global enterprise benefiting the customer base through increased scale and access to new technologies. “Wesco’s broad customer base and industry-leading capabilities have positioned it well to benefit from long-term trends in the aerospace and defense industry,” Samson said in the statement. Attempts to reach a representative of Wesco were not successful. But Wesco Chief Executive Todd Renehan said he was excited about the opportunities a combination with Pattonair will bring to the company. “This transaction is a strong validation of our customer value proposition, and it will allow us to find new and innovative ways to bring more value to customers, enhance relationships with suppliers and create additional opportunities for employees,” Renehan said in a statement. Pattonair Chief Executive Wayne Hollinshead said the addition of Wesco will create new avenues for growth and expansion. “Wesco is an outstanding business with an impressive track record for innovation and customer service,” Hollinshead said in a statement. “We are excited about the prospects of working together.” The acquisition is expected to close by the end of the year. Wesco, a publicly traded company, will become privately held and shares of its common stock will not be listed on the public market. After spiking 76 cents to $11.08 on Aug. 9, shares in the Valencia aerospace parts and supply chain services provider dropped by 14 cents a few days later. The closing price Aug. 28 was $10.94. On Aug. 9, the company reported its fiscal third quarter results. It said it had adjusted net income of $22.7 million (23 cents a share) for the quarter ending June 30 compared to adjusted net income of $20.1. million (20 cents) in the same period a year earlier. Revenue increased 8 percent to nearly $442 million. Analysts on average expected earnings of 23 cents on revenue of $435.6 million, according to Thomson Financial Network. Debt concerns Platinum Equity will finance the deal through a combination of committed equity financing provided by affiliate investors as well as debt financing from Bank of America Merrill Lynch. Wesco’s three largest shareholders, affiliates of Carlyle Group and Makaira Partners, as well as the Snyder Family Trusts, support the transaction and will vote their shares in favor of the transaction. Platinum Equity also owns Electro-Rent Corp., a testing and computer equipment supplier in Van Nuys. Ciarmoli said in his research note that taken in aggregate, the Platinum Equity portfolio contains a number of aerospace and defense companies that if combined could be spun off into a new publicly traded company. “This would meet market demand for new investable defense assets as demonstrated by recent Parsons IPO,” Ciarmoli wrote. Parsons Corp., in Centreville, Va., a provider of technology-driven products in the defense, intelligence and critical infrastructure markets, went public in May. Ciarmoli gave Wesco a “buy” rating with a price target of $13. An analysis of the deal by Martin Hallmark, a senior vice president in the Corporate Finance Group of Moody’s Investors Service Ltd., in London, said that the merger is credit positive for Pattonair and will increase its scale and customer, geographic and product diversity. However, it may also increase leverage as Moody’s expects Platinum to raise additional debt in the combined company to finance the deal. “The company has yet to disclose the expected capital structure of the combined group, but Moody’s expects the debt in both Wesco and Pattonair to be refinanced,” the analysis said. The combined group is forecast to have pro forma revenue of $2.1 billion, with $1.6 billion coming from Wesco based on fiscal 2018 performance and $500 million from Pattoniar as of the end of last year. Hallmark’s analysis also determined that the merged companies will have a balanced geographic footprint, which he said would have a split of 67 percent revenue from the Americas and 28 percent revenue from Europe, Middle East and Africa. Wesco’s diverse portfolio of hardware, chemicals and electrical components will complement Pattonair’s focus on hardware. Additionally, Wesco has a balanced split between commercial and military aerospace, which will complement Pattonair’s focus on commercial aircraft, the analysis said. Pattonair is reliant on one main customer, Rolls-Royce plc, for about 50 percent of its sales. The merger will alleviate this customer concentration and increase scale to strengthen its ability to manage industry challenges, in particular ramping up new contracts and inventory growth. “It also allows for potential central cost savings and cross selling, particularly through widening contract scope across Wesco’s broader product range,” the Moody’s analysis stated.