December 6, 2021

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Meggitt/TransDigm: private equity, public concern

Meggitt PLC updates

TransDigm’s website bears the strapline “private equity-like capital structure and culture”. This plays badly in the UK right now. A slew of takeovers of UK companies by US private equity groups has alarmed Britons. The Ohio-based group is intent on buying Meggitt, a UK aerospace and defence group, for a mooted enterprise value of £7.8bn.

An animal of indeterminate species would arouse similar suspicion attempting to access a henhouse with the calling card “foxlike cunning and appetites”. Understandably TransDigm’s bid raises eyebrows.

Blanket resistance to foreign buyouts is sheer protectionism, however. There is a better, narrower case for Britons to resist takeovers of companies with unique defence technology on national security and stakeholder grounds. The £2.6bn bid by US private equity group Advent for Ultra Electronics, a submarine warfare expert, offers a case in point.

Meggitt has a wider product range with no obvious crown jewels and less exposure to defence. Business minister Kwasi Kwarteng is bound to scrutinise any formal offer, even so. He already has an eye on a £7.1bn agreed bid from US engineer Parker-Hannifin. But Kwarteng would be wise to wave through whoever bids most, using binding commitments to the UK and the Meggitt pension fund as reasonable conditions.

TransDigm’s covenant will not thrill trustees of the £1.2bn scheme, which has a £300m accounting deficit according to filings. The US group has some $16bn in net debt, 7.4 times prospective ebitda. Lex calculations suggest the figure would rise to a vertiginous 10 times following an all-cash deal.

Independent analyst Howard Wheeldon describes the premium as “incredible”. It is almost double Meggitt’s undisturbed three-month value and over 24 times prospective ebitda. Covering the premium in cash terms would require big cost cuts that doubled Meggitt’s operating margin.

TransDigm’s US investors should examine the suggested deal just as carefully as anxious Britons. The acquirer looks a lot like a debt-fuelled roll-up. Often such vehicles eventually bite off more than they can chew.

The Lex team is interested in hearing more from readers. Please tell us what you think of recent US bids for UK companies in the comments section below.

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