British defence group Meggitt soars on takeover offer from Parker-Hannifin

Parker-Hannifin, the US maker of industrial motion-control systems, agreed to buy Meggitt for £6.3bn in cash to strengthen its hand in a rebounding aerospace industry.

Shares of Meggitt surged the most on record after the 170-year-old company said its board would recommend the offer at 800p per share, 71% above Friday’s closing price. The huge premium will make it harder for a rival to jump in and snatch the Coventry-based target, after a string of US buyouts of British aerospace and defence firms.

British business secretary Kwasi Kwarteng is taking an active interest  in the Meggitt offer, a person familiar with the matter said, suggesting ministers may seek more reassurances on preserving jobs.

The deal would be the biggest ever for Parker-Hannifin, which has stepped up takeovers under chair and CEO Tom Williams. The company, which supplies a variety of industries, was on a tear before the coronavirus pandemic, with the $4.3bn purchase of filtration-products manufacturer Clarcor in 2017, and materials-science specialist Lord Corporation for $3.7bn in 2019.

Adding Meggitt will nearly double the size of Parker-Hannifin’s aerospace systems unit, it said in a statement. That would position the Cleveland-based company to better compete in an aviation sector that’s just emerging from the biggest slump in history.

“We wanted a price that would be very compelling, that would gain shareholder support and would be very clear that we’re the best owner,” Williams said in an interview. “This is a company we’ve liked for a long time.”

The deal is so big it will rule out further M&A by Parker-Hannifin for the next three years, Williams said, as the company focuses on investment, dividends and paying down debt to lower leverage ratios.

Stock jump

Monday’s stock move vaults Meggitt above pre-pandemic levels. Prior to the outbreak, the stock had been gaining steadily amid a turnaround under CEO Tony Wood. Meggitt said as far back as 2016 that it would consider offers at the right price.

Its shares jumped 55% to 727.68p in London, after rising as much as 62%. Parker-Hannifin fell 1.6% to $306.96 in New York. With a market value of about $40bn, it’s some five times the size of its target.

Targets

The deal is the latest example of US buyers eyeing UK aerospace. Cobham, the UK defence contractor acquired in 2020 by US private equity firm Advent International Corporation, in July made a £2.6bn approach for Ultra Electronics Holding.

Senior, which makes aerospace parts for Boeing and Airbus, rejected a buyout offer from Texas-based Lone Star Funds in July. David Squires, Senior’s CEO, said Monday that while the bid “fundamentally undervalued” the company, it’s still open to approaches.

The government examined the first Cobham deal and said it will do so with the Ultra proposal.

Parker-Hannifin promised to continue supplying the UK government, and maintain technology and manufacturing in the country. A majority of Meggitt’s board will remain British.

Williams said that he’d protect a significant proportion of Meggitt jobs and will seek to grow the business, not break it up.

“That’s not at all our strategy,” Williams said in the interview. “We like the entirety of this business and we intend to own it for a very long time.”

On a conference call, the CEO said the pledge to increase UK research and development spending is valid for five years, while the other commitments last for 12 months.

Parker-Hannifin, founded in 1917, has a significant UK presence, providing hydraulics and pneumatics for aerospace, automotive and heavy industry customers. It is already a defense supplier to the British government.

The US company said one attraction was a business transformation of Meggitt over the past four years. Another benefit is Meggitt’s more advanced technology in areas including braking systems, advanced sensors and thermal management, Williams said.

Meggitt’s origins go back to 1852, according to its website, under Negretti & Zambra, a scientific instrumentation business which invented the world’s first altimeter for the hot air balloon.

Meggitt has been the subject of recent takeover speculation, including a potential deal with US-based Woodward  and a Times of London report on an approach by a mystery bidder.

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