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B/E Aerospace Flies in New Direction, Explores Sale

Stocks in this article: BEAV UTX HON TDG

NEW YORK ( The Deal) -- High-flying aircraft interiors manufacturer B/E Aerospace (BEAV) late Sunday said it has hired Citigroup and Shearman & Sterling to help it explore options, including a potential sale.

The surprise move, which included canceling B/E's scheduled Monday investor day, caught analysts and investors off-guard. Company chairman and CEO Amin Khoury weeks ago on a quarterly investor call implied B/E was looking to buy and not sell, saying it had signed letters of intent to acquire two manufacturing businesses.

Wellington, Fla.-based B/E, a maker of fasteners, seating and other equipment for commercial and business jets, said it would explore options including a possible sale of the company, a spin-off of select businesses and other moves, but gave few details.

The seemingly quick change in direction raises questions about whether B/E was recently approached by a potential suitor, or perhaps reacting to an activist investor who might want to change aspects of the business. Indeed, a split of B/E might be more likely than an outright takeover.

Deutsche Bank Securities analyst Myles Walton wrote that dealmakers would likely have to be "rather creative" given BE's relatively high valuation compared to its peers. Sterne Agee Group's Peter Arment also suggested a breakup might be in the works, with the company potentially splitting its distribution unit off to a private equity buyer and then finding a strategic buyer for its remaining commercial and business jet properties.

"While a strategic buyer might want all of [BE Aerospace's] assets, we believe most would prefer not to own a distribution company," Arment wrote. The analyst said it is possible BE Aerospace could fetch 11 to 14 times forward Ebitda in a sale, compared to its current price of about 9.9 times 2015 estimates.

Interiors are in high demand as airlines race to update their fleets with more fuel efficient new planes, and invest in improving the cabins of older jets in hopes of attracting more business. German seating manufacturer Recaro GmbH & Co. KG on Monday voiced its potential interest in B/E.

An aerospace banker reached Monday said that "there is no shortage" of potential bidders including B/E rival Zodiac Aerospace SA of France.

Zodiac would likely only be able to get involved with significant help from a private equity partner who could help finance the deal and take the distribution assets, the banker said. Another potential bidder, United Technologies, (UTX) is likely too busy digesting its 2011 purchase of Goodrich but could be a wild card.

Cowen & Co.'s Gautam Khanna cautioned B/E's size and valuation limits potential suitors, and said some of the large-cap firms that could afford the company could pass for various reasons. United Technologies, given its significant aerospace exposure post-Goodrich, might not want to go further into the business, while Honeywell International (HON) seems to be moving in different directions.

Khanna said TransDigm Group,  (TDG) which like B/E has large aftermarket exposure, could be interested, "but we believe the firms have dissimilar operating practices."

B/E's efforts to diversify its distribution unit would make it a viable candidate to be a standalone business. The business as recently as 2003 was almost entirely tied to commercial aerospace markets, but has moved steadily into new areas including oil and gas services.

The company has used a series of acquisitions to expand the business, in January adding both LT Energy Services Inc. and Wildcat Wireline Inc. for a combined $265 million to expand its oilfield logistics services presence in the U.S. southwest.

Shares of B/E opened up 10%, to $97 apiece, Monday morning on the news. Arment said that in a sale the distribution segment could be worth upward of $43 per share and the aerospace operations between $70 and $89 per share, in a best-case scenario, valuing the company's equity at nearly $14 billion.

B/E also has about $1.6 billion in debt.

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