Monday Jul 1 2024 17:09
5 min
After months of negotiations, U.S. airplane manufacturer Boeing and its fuselage supplier Spirit AeroSystems have agreed to a deal, marking a step towards enhancing the former’s quality standards.
On Monday, Boeing announced it would acquire Spirit AeroSystems for $37.25 per share in stock, valuing the company at approximately $4.7 billion in equity and $8.3 billion including its debt.
In a news release cited by Barron’s, outgoing Boeing CEO Dave Calhoun said:
“We believe this deal is in the best interest of the flying public, our airline customers, the employees of Spirit and Boeing, our shareholders, and the country more broadly. By reintegrating Spirit, we can fully align our commercial production systems, including our Safety and Quality Management Systems, and our workforce to the same priorities, incentives, and outcomes.”
Boeing is paying roughly eight times Spirit’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA), a figure from a year before the 737 MAX crashes and the Covid-19 pandemic.
The deal price also reflects a 30% premium over the $28.60 share price on February 29, the day before both companies confirmed they were in deal talks. Reuters reported on Sunday that an agreement was imminent. In premarket trading, Spirit shares rose by 6%, while Boeing shares declined by 1.1%.
The Boeing share price dynamic reversed after the market opened, as the aerospace firm’s stock jumped by over 2.5%, trading around the $186.5 mark. Spirit Aero shares were also in the green, rising by over 4% to $34.19.
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Investors are focusing on prior earnings due to Spirit's recent turmoil, with positive EBITDA not expected until 2024, according to FactSet. EBITDA is projected to return to 2019 levels by 2026, according to Barron’s reporters Al Root and Adam Clark.
Spirit's earnings are depressed in 2024 as Boeing isn't building as many MAX jets as anticipated following an emergency door plug blowout on a 737 MAX 9 operated by Alaska Air on January 5, leading to slower production and increased regulatory oversight. The aerospace manufacturer has been subject to a number of probes by the Federal Aviation Administration (FAA) this year over compliance with safety standards and the validity of its inspection records.
Boeing will issue stock equivalent to roughly 4% of its outstanding shares to finalize the deal, which is expected to reduce Boeing’s 2024 and 2025 earnings per share, according to Jefferies analyst Sheila Kahyaoglu. In a Monday report cited by Barron’s, Kahyaoglu wrote:
“Ultimately, there is the potential for far higher savings from Spirit AeroSystems, and it is hard not to acknowledge Spirit’s shortfalls in deliveries have led to inefficiencies and cost growth across Boeing’s business caused by uneven production rates”.
Kahyaoglu has a positive view on the deal and maintains a Buy rating on Boeing shares with a $270 price target.
This merger will end Spirit’s decades-long independence. Spirit was originally part of Boeing until 2005 when it was sold to a private equity firm and later went public in 2006 at $26 per share. The $37.25 price implies an average annual gain of about 2% for investors, excluding dividends, although Spirit shares traded above $100 in 2018.
Spirit AeroSystems closed at $32.87 on Friday, about 12% below the deal price. Barron’s Root and Clark shared their opinion on the share price dynamics:
“The shares won’t likely trade to $37.25 on Monday. It depends partly on what Boeing stock does. What’s more, investors don’t get $37.25 worth of Boeing stock immediately. The deal will take months to close".
Year-to-date, Spirit stock has risen about 7%, trading on expectations of a Boeing acquisition. In contrast, Boeing shares have fallen about 30%, while the Dow Jones Industrial Average has gained close to 4%.
When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.
Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
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