Why Beechcraft makes sense for Textron
Beech and Cessna are coming together 85 years after their last joint-venture failed. But it makes sense for Textron to own Beechcraft and Cessna.
So, 2013 turned out to be a good one for Textron.
By buying Beechcraft for $1.4 billion, Textron will end up with a unique portfolio of aircraft ranging from single-engine Caravans and Skycatchers, through King Airs, right up to Citation jets. Just as significantly, it adds an installed fleet of 36,000 aircraft that need support. Textron will actually be responsible for supporting the majority of business aircraft flying today.
The acquisition is not expected to close until mid-2014, so it is unclear how Beechcraft will fit into Textron (although it does look set to combine the Cessna and Hawker Beechcraft service divisions). While the acquisition makes Beechcraft’s future safer, unfortunately it also means more uncertainty for Beech employees who have already been through several tough years.
Much of the commentary on the deal has focused on the ability to up-sell King Air customers to jets. Textron, however, is not really including this in its financial rationale for the acquisition. Textron says that it hopes to benefit from synergies of $65 million in 2014 (and $75 million in both 2015 and 2016) and that nearly all of this will come from cutting costs.
It is amazing much Beechcraft changed in 2012 and 2013. Beechcraft is estimating sales of $1.8 billion for the whole of 2013 and a profit of $150 million. Its margin is actually better than Cessna’s, mainly because services are a larger part of Beechcraft.
The acquisition of Beechcraft – and the certification of the M2 and the Citation Sovereign+ – should give everyone at Cessna a boost, as tt has also been a tough few years for the Wichita company. One depressing fact is that the combined sales of the two companies in 2014 will probably still be less than just Cessna’s sales in 2007.
Cessna’s $1.86 billion of sales for the first nine months of 2013, was down by $350 million compared to 2012 (it also made an $81 million loss in this time). The company often makes up sales in the last quarter of the year, but it will deliver less aircraft in 2013 than it hoped because of late certification.
Clyde Cessna and Walter Beech launched a joint company – Travel Air Manufacturing Company – in Wichita in 1925. It lasted until the great depression four years later when the company was bought and Beech left to launch Beechcraft. This time, the two companies are merging after a recession and are well placed for a US economic upturn. However, while the turboprop market is a different one to the jet market, Textron’s earnings will remain volatile.
Although these have been tough years for Cessna, it is worth stressing that it has been an excellent buy for Textron. It acquired the company from General Dynamics for $670 million in 1992 (about $1.15 billion today) when Cessna had sales of $820 million.
In the last 10 years alone it has given Textron a profit of $3.7 billion (without adjusting for inflation). Beechcraft could prove to be just as good an investment. So it probably was worth spoiling the holidays of everyone involved.