Industrial transport group BBA Aviation (BBA) may soon double in size after announcing plans to buy rival aviation services group Landmark for $2.065 billion. The shares are down due to plans for a 133p per share right issue to help fund the deal. On paper it looks exciting, but should we be wary of the term 'transformational acquisition'?
Some seasoned investors believe this term is a red flag as more often than not the acquiring company has taken on more than it can handle. There may not be a cultural fit between entities and there's a chance management will not share the same vision.
Bain & Company issued a report in 2004 that found 70% of large deals fail to create meaningful shareholder value. Think of RBS and ABN Amro; Daimler Benz/Chrysler; and AOL/Time Warner.
The big problems were that directors ignored potential integration challenges, they over-estimated synergies and they had problems integrating management teams and/or retaining key mangers. While the research is old (it analysed 15 years of M&A data), I doubt much has changed in the past 11 years.
BBA was last night valued at £1.34 billion. On current exchange rates it is paying £1.35 billion for Landmark. The combined group will operate from 189 locations worldwide, far higher than its nearest competitor at 69, says house broker Jefferies.
'This is a transformational step in the continued execution of BBA Aviation's strategy that is both strategically and financially compelling,' insists BBA's chief executive Simon Pryce.
Liberum Capital has a 'sell' rating on the stock, saying it is worried about the outlook for the business aviation market and that this takeover significantly increases BBA's exposure. The deal will stretch BBA's balance sheet but management expect a rapid pay down of debt.
'Flying activity has stagnated of late, trailing the improvements in economic activity and corporate profitability that it normally tracks. In our view, it is clear that continued growth in the industry is required for the timing and pricing of the Landmark acquisition to make sense,' adds Liberum.
BBA says return on invested capital is expected to exceed the weighted average cost of capital in 2018. That's three years to wait before the deal is truly beneficial to shareholders. Earnings per share will be enhanced by the acquisition from 2017.