Boeing Extends Bet on Parts, Services in $3.25 Billion KLX Deal

(Bloomberg) -- Boeing Co. is boosting its bet on a new services division with Chief Executive Officer Dennis Muilenburg's biggest deal yet.

The world's largest planemaker will buy aerospace parts distributor KLX Inc. for $3.25 billion while also taking on about $1 billion of net debt. The deal is contingent on the separation of KLX's energy business, which the company plans to spin off to shareholders.

The purchase underscores Muilenburg's bid to extend Boeing's reach into the highly profitable business providing maintenance, spare parts and other services over the multi-decade lives of jetliners and military aircraft. The Boeing CEO has set a goal of more than tripling sales at the company's newly formed services division to $50 billion within a decade.

“We continue to see global services as our biggest market-growth opportunity,” Muilenburg told reporters at the company's annual meeting Monday, hours before the deal was announced.

KLX fell 10 percent to $70.32 at 10:52 a.m. in New York after dropping as low as $70.15 for the biggest intraday decline in almost two years. Boeing slipped 1.7 percent to $327.91.

‘Compete and Win'

Boeing's ambition to dominate aircraft repairs and services will likely spur more consolidation among aerospace suppliers that depend on the aftermarket for the bulk of their profit, Robert Stallard, an analyst with Vertical Research Partners, said in a note to clients. Rockwell Collins Inc. acquired KLX's former corporate parent, B/E Aerospace Inc., last year before agreeing to sell itself to United Technologies Corp. in one of the biggest-ever aerospace mergers.

“This deal marks another step forward in Boeing's ambitious plans to expand its Global Services division, or as Boeing calls it ‘compete and win,' ” Stallard wrote. “For every winner there is a loser, and for aerospace suppliers there will probably be fresh concern that this further increases Boeing's purchasing power, and awareness of the economics in the aero aftermarket.”

For a Bloomberg Gadfly column on Boeing's plans for services, click here

KLX will become part of Boeing Global Services and will be fully integrated with the planemaker's parts subsidiary, Aviall. The deal will generate an anticipated annual cost savings of $70 million by 2021, according to a Boeing statement. The company will pay $63 a share for KLX, financing the acquisition primarily through cash on hand.

Boeing said its 2018 guidance, capital deployment strategy and commitment to returning free cash flow to shareholders won't change. The Chicago-based company expects the acquisition to be neutral for earnings through next year.

The deal is the largest struck so far by Muilenburg since he ascended to the CEO role in mid-2015. Boeing has held preliminary talks with partsmaker Woodward Inc., according to reports in February, and is deep into talks to form a joint venture that would give it control of Embraer SA's commercial jets.

While Boeing remains focused on organic growth, the company is exploring targeted takeovers and investments to round out its product portfolio, Muilenburg said. Boeing is also scouting deals in areas such as avionics -- electronic communications or navigation equipment -- where the planemaker is taking over work previously handled by suppliers.

Muilenburg created the services division last year by assembling an assortment of highly profitable units that support customers and altogether account for about 15 percent of total sales. The foray rattled aerospace suppliers and engine makers, which typically make the bulk of their profit tending to aircraft over the 30 or more years the planes are flying.

KLX, which was spun out of B/E Aerospace in 2014 amid pressure from shareholder activists, generated about 90 percent of its $1.49 billion in sales from aircraft parts and aftermarket services in its most recent fiscal year. The Aerospace Solutions Group has approximately 2,000 employees with customer-service centers in about 15 countries.

Energy Services

The rest of KLX's revenue came from the operation catering to oil and gas drillers, which is to be spun off to shareholders as KLX Energy Services. Amin Khoury, who heads KLX and co-founded its predecessor with his brother Bob in 1987, will run the new energy company as chairman and CEO, he told analysts during a call Tuesday.

While KLX fielded offers for the energy business, Khoury said they didn't fully value a rebound underway at the division where revenue is growing rapidly, reversing years of decline. The divestiture is expected to be completed during the third quarter, when Boeing also expects to close its acquisition, which is subject to shareholder and regulatory approvals.

“During the course of the company's review of strategic alternatives, it became apparent that the performance of our energy services business was accelerating and would in fact significantly exceed the guidance we had provided only months earlier,” Khoury said.

“Ultimately, it became clear that the upside in the ESG business could best be captured by pursuing a spinoff of the business to existing KLX shareholders,” he said, referring to the energy division by an acronym.

Investors didn't share his optimism.

“The spinoff makes the realization of value for investors more complicated as the deal is predicated on a successful divestiture of KLXI's Energy assets,” Michael Ciarmoli, an analyst at SunTrust Robinson Humphrey, said in a note to investors. “We think investors would have preferred a takeout of the whole company.”

--With assistance from Dave McCombs and Esha Dey

To contact the reporter on this story: Julie Johnsson in Chicago at jjohnsson@bloomberg.net.

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson

©2018 Bloomberg L.P.