A week after the March 2011 revelation that EADS was in discussions with Toronto Stock Exchange listed Vector Aerospace, a support agreement with EADS subsidiary Eurocopter Holding will acquire all of Vector’s issued and outstanding common shares for consideration of C$ 13 ($12.95) per share, valuing the firm at about C$ 625 million. The offer price is 15% above the closing price when trading was halted, and 80% above the price on Dec 31/10, when the firm publicly announced that it was open to merger offers.
Therein hangs a pair of tales – one concerning the buyer’s rationale, and another concerning the takeover saga itself. The EADS acquisition was actually the indirect product of a failed internal takeover bid in 2009…
The crux of the matter has always been an agreement that requires 2/3 of Vector’s shareholders to approve any offers to sell the business. That agreement helped depress the value of the firm’s shares, which made it a valuable target – if the buyer could find a way around the restriction.
Kenneth Rowe’s IMP Group International Inc. owned 37% of Vector, giving it a blocking position. In September 2009, Rowe tried to convert that into a majority position without a formal takeover, offering C$ 6.52 per share to existing shareholders, in hopes of buying 6 million shares and boosting his stake to 50%. An independent committee of the Board deemed it a lowball bid, however, as the stock began September 2009 at C$ 6.80 per share, and stayed above C$ 6.70 until the month’s final week. The Board countered with a Q4 2009 move that created and sold an additional 8.165 million shares in the company, raising almost $50 million (q.v. 2009 Annual Report, PDF).
The net effect of that move was to expand share capital by approximately 21% to 45.9 million shares, diluting IMP’s stake to just 31%, and removing its certain blocking position. That allowed the Board to begin looking at mergers and other exit strategies, pushed in part by investment firm West Face Capital’s buy-up of a 20% position in the company.
In its release, EADS said it has secured irrevocable consents for 60% of Vector’s shares – commitments that are rumored to include both IMP Group’s shares ($191.7 million value) and West Face Capital’s shares ($114 million value).
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While Vector’s business extends beyond North America into the UK, the Middle East, and South Africa, the buyout is also EADS’ 2nd major North American acquisition, after it bought PlantCML in 2008. The core rationale of this acquisition was described by EADS as:
“…a catalyst for the growth of Support & Services with a focus on the high end segment and the servicing of multi-customer platforms both in the civil and governmental markets. Vector Aerospace will also strengthen EADS’ presence in North America, improving the natural $ hedge… Completion of the transaction will enable Eurocopter to capitalize on its own commercial network together with Vector Aerospace’s offering in order to position itself as a leading global multi-platform service provider with an extended presence in North America and the UK. Vector Aerospace will benefit from Eurocopter’s global footprint and presence in 25 countries to develop in fast growing markets such as Asia and Latin America.”
EADS will take over Vector via its Eurocopter division, in part because Vector is strongly linked to helicopter maintenance. Vector also has fixed-wing, engine and avionics support businesses, but then, so does Eurocopter, via subsidiaries like Australian Aerospace.
At this point, EADS’ commitment is that Vector Aerospace will continue under its own brand name and management, in a relationship described as “arms length.” While Vector is definitely the junior partner, the firm’s C$ 545 million/ EUR 400 million in 2010 sales were almost 25% of Eurocopter’s total EUR 1.7 billion support turnover, which is an important step toward EADS “Vision 2020” goal of doubling the conglomerate’s services revenues from 12% to 25%, and it has important geographic footholds in coveted areas like North America and Britain. Vector also offers multi-platform diversification beyond EADS’ own machines.
As the average age of military air fleets around the world continues to rise, and civilian aviation growth happens in new areas of the world, a unified corporate focus on the lucrative, but increasingly challenging maintenance market will be an important dimension for many firms. EADS own Vision 2020 recognizes this, as it seeks to expand Maintenance, Repair, & Operations revenues from the current xx% to 25% of the firm’s intake.
An arm’s length relationship could be part of that approach, but the acquisition will only deliver value if it can tie the firms’ respective strengths together. The general corporate trend is that over the medium to long term, acquisitions usually fail to deliver synergies and positive shareholder value. If EADS wants to buck that trend, its management will need to find ways to ensure that Vector, which itself grew via acquisitions, remains focused and unified, then look for ways to reward EADS employees for boosting an arm’s length company’s growth and performance. That’s not an impossible order, but it is a challenging one; and any shifts in course must come without destroying the current roster of talent, experience, and market connections that created Vector’s value in the first place.
See: EADS | Vector Aerospace [PDF] | Canada’s Financial Post | Canada’s Globe and Mail | Flight International.