We should all welcome Superior Aviation’s bid for Hawker Beechcraft

Congratulations to Hawker Beechcraft.

Whilst some are sceptical of Superior Aviation’s $1.79 billion bid, it is, in fact, an exceptional deal for the company, its staff and customers.

Hawker Beechcraft is a good company with good products, good staff and good management. But because of its unsustainable debt it has been starved of investment. Superior Aviation plans to invest in both the Hawker and Beechcraft products.

Perella Weinberg Partners, Hawker Beechcraft’s advisers, are comfortable that Superior Aviation has the cash and commitment to close and whilst there is a risk that some politicians will take the opportunity to criticise the deal, with the defence business staying in the US, it is hard to see how the deal could be blocked.

Superior Aviation and its bid team – Grant Thornton and law firm Locke Lord – are busy conducting due diligence now. People involved in the process say they have been impressed at the dialogue they have had with the Chinese bidder and its advisers and their ability to understand complex tax and pension issues quickly. Superior Aviation is rumoured to have raised its first round bid significantly as it grew comfortable with the manufacturer.

The biggest risk to the deal closing is another bidder. There has been talk of Embraer or Cessna raising their bids, but this is unlikely.  Both would like to buy Hawker Beechcraft but they have shareholders to answer to and existing businesses to integrate with. Their rational economic bids cannot compete with a strategic bidder like Superior Aviation which will pay more to enter a whole new market.

The same is true with private equity bidders who never like to be seen to overpay (Goldman Sachs Partners and Onex’s purchase of Hawker Beechcraft demonstrates what happens when you do this).

Mahindra, advised by Rothschild, is perhaps the only other bidder that could attempt to top Superior Aviation’s bid. Like Superior, Hawker Beechcraft would transform the Indian company, Superior Aviation has the advantage of 45 days of exclusive talks but if Mahindra choose to bid, it could quickly get up to speed using data that the manufacturer had collected for Superior. Although it is worth remembering that Mahindra is a listed company and does not have the flexibility of the mainly private Superior.

Good news for Hawker

The good news for staff at the manufacturer is that both Superior and Mahindra appear committed to the loss-making Hawker production line. The Hawker 4000 has not been a commercial success but it is a good aircraft. The problem is that it costs too much to build. This and the weak market for mid-size business jets, which has reduced sales prices for all manufacturers, has cut Hawker’s margin on each aircraft.

Management at Hawker have known about this problem for years but, because of having to make debt repayments, they have not had the cash to invest in streamlining production. Superior says it will do this. One manufacturer estimates that Superior might need to invest $300 million to cut production costs. If Superior does this it will not just be saving a great aircraft brand, it will be guaranteeing thousands of skilled jobs in Wichita, Kansas. As a Chinese company it should also be able to find cheaper suppliers for some parts.

Selling defence

Many headlines still refer to Hawker Beechcraft as being owned by Goldman Sachs and Onex. It is worth remembering that the real owner is now Centerbridge Partners and the debt holders. They are rumoured to be pretty happy with Superior Aviation’s bid (in fact there is a danger they may try and get more). Perella Weinberg’s next challenge is to sell the profitable Hawker Beechcraft Defence.

This may sound easier than selling the commercial business but now is not a good time to sell a defence company. Mergers and acquisitions do not like uncertainty and the threat of sequestration to the US defence budget – a long word for big cuts – later this year does not help. In 2011 it is rumoured that Hawker Beechcraft received an offer for the defence business it will do well to get the same amount now.

Will Hawker Beechcraft stay in the US?

Sceptics will say that Hawker Beechcraft will be shipped to China and of course in the long-term this could happen. However, it is also an oversimplification.

For at least the next five to 10 years Superior Aviation says the company will stay in Wichita and this makes sense. After that it is likely that some production will stay in the US with more parts and components coming in from Chinese suppliers.

“Superior is committed to maintaining Hawker Beechcraft’s strong presence in the United States and retaining its current employee base and experienced management team, while positioning the company for future growth at home and abroad,” said Bill Boisture, Chairman of Hawker Beechcraft Corporation.

Some production in China is also likely. As a Chinese company Superior has a much greater chance of making this work than Cessna or Embraer which have joint ventures with China Aviation Industry Corporation (AVIC). Things have definitely changed since McDonnell Douglas set up its disastrous joint venture in 1985 but the risk of failure is still very high for partnerships. Hawker should have a big advantage here.

There will continue to be a lot of outrage about a great US company like Beechcraft being sold to China (it is worth remembering that Hawker was a UK company). The truth is that the company was always destined to be sold abroad to a strategic buyer.

“It was clear that the likely buyer was going to be Chinese,” says Michael Richter, managing director and co-head of Lazard’s aerospace and defence group in Los Angeles, a major adviser of aerospace mergers and acquisitions. “The country has been building major aerospace capabilities and Hawker Beechcraft is the largest and most significant component.”

Some have argued that it would have been easier if the buyer was AVIC – the huge (and some would say dysfunctional) Chinese aviation company which no doubt bid, In fact, it would not be impossible that two competing parts of AVIC may have submitted competing bids.

It is easy to be dismissive of companies that you have not heard of, but there are a lot of large companies in China that foreigners do not know. Superior Aviation is an entrepreneurial company backed by local government which has done a good job of growing Superior Airparts – the largest supplier of PMA parts to turboprop engines – after buying it when it was in Chapter 11.  There is no reason why it cannot do the same with Hawker Beechcraft.

Whilst it is easy to overhype the short term prospects for business aircraft in China, Superior will give Hawker Beechcraft unrivalled access to this market. Like US buyers, Chinese customers are often loyal to local companies.

“China has built strong presences in other transportation industries,” says Julian Mitchell, director, equity research, Credit Suisse Securities in New York.  “In rail, the Chinese manufacturers are global leaders and it is the number one shipbuilder globally. Why should aerospace be different?”

Rather than attacking Superior Aviation’s bid we should be welcoming them and looking forward to a new chapter – much better than Chapter 11 – in Hawker Beechcraft’s history.

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