The recommended cash acquisition of Meggitt that was announced this morning is not only strategically and culturally compelling but importantly, because it has been purposely differentiated to relieve concerns observed around some other recent UK aerospace and defence sector M&A activity, unprecedented in that it has provided answers required before questions had been asked.
Built around unlocking and further developing the strengths of both companies in a market that both companies rightly believe is poised for a return to growth, the planned acquisition of Meggitt by Parker-Hannifin is based on the desire to build on the strengths and legacies of both companies, enhancing future prospects and growth creation.
What sets the proposed acquisition of Meggitt by Parker-Hannifin apart from other recent deals are the level of binding commitments made by Parker-Hannifin to the UK Government. In recognising the importance of Meggitt’s rich UK heritage and relationships with its key stakeholders, Parker-Hannifin has agreed with Meggitt that it will offer legally binding commitments that ensure:
Meggitt will continue to meet contractual obligations in respect of goods and services supplied to or for the benefit of HM Government
Maintain existing technology and UK manufacturing sites for the benefit of HM Government, ensure that Meggitt continues to comply with and enforce security protocols prescribed by HM Government and that will allow for officials to inspect Meggitt’s premises to verify compliance, in each case unless HM Government otherwise consents.
Ensure that the majority of the board of directors of Meggitt will be UK nationals
Maintain Meggitt’s UK headquarters, operate each of Meggitt’s existing divisions under the combined Parker-Meggitt name.
Ensure all four current divisions of Meggitt remain in place.
Maintain Meggitt’s existing R&D, product engineering and direct manufacturing labour headcount in the UK at no less than current levels, while increasing by at least ten per cent. the number of overall apprenticeship opportunities currently offered by Meggitt in the UK.
At least maintain Meggitt’s existing level of R&D expenditure in the UK and, subject to normal levels of aerospace industry growth and activity, increase this by at least 20 per cent over the next five years.
Commit to Meggitt’s targets of reducing net carbon emissions by 50 per cent. by 2025 and achieving net zero greenhouse gas emissions by 2050 across the existing Meggitt business.
Based in Ohio, US, Parker-Hannifin is best known for producing a wide range of motion and control equipment. A global industry leader supporting customers in a range of diverse areas that include Aerospace, Transportation, Oil & Gas, Industrial Manufacturing Equipment, Power Generation, Healthcare, Electronics and Semiconductor, Chemical Processing, this is a company that has an unrivalled level of expertise and product breadth.
Well-known and highly respected across all aspects of engineering and capital goods industries and disciplines, Parker-Hannifin is an international company and one that has been operating in the UK for the past 50 years.
In the UK the company employs 2,100 personnel working in 18 different facilities supplying what is quite probably the widest range of products available from any one single supplier. During the 50 years of operating the UK the company has built highly respected expertise in nine major engineering-based technologies: hydraulics, pneumatics, electromechanical, filtration, process control, fluid and gas handling, sealing and shielding, climate control and aerospace.
With an unparalled global distribution network of 13,000, the combination of Parker and Meggitt provides superb opportunities for both companies along with the ability and strength to better move forward through a period of aerospace industry recovery that has already begun to one of anticipated strong future growth and opportunity. Within both companies, aerospace and defence innovation is at the heart of this plan. Importantly as far as I am concerned, both companies have long operated on a strong belief that investing for the future is best done through research and development, service and innovation.
The potential of takeover bid for Meggitt has been around for almost as long as I can remember and even ignoring the excellent recommended terms of the recommended Parker-Hannifin proposal (800p in cash which values Meggitt at £6.3 billion on a fully diluted share basis and which are at a premium of approximately 70.5% to the closing share price of Meggitt on July 30th) I am in no doubt that the future of Meggitt is best served by the company being part of a strong international organisation – one that understands the responsibilities that is has and one that has in the commitments it has made undertaken to ensure that the combined Parker-Meggitt can go from strength to strength.
Producing first half results this morning demonstrate that Meggitt has weathered what has been a very difficult Covid related storm within its important OE and AM aerospace activities and also that recovery is already very evident. Recovery in the aerospace industry will at some point soon lead to the resurgence of growth. However, with huge changes in the industry now apparent particularly in respect of environmental requirements, in order to achieve growth in the years ahead will require continued investment in research technology development -without the need to constantly look over the shoulder at shareholders.
Parker-Hannifin have in this now recommended bid process made far reaching commitments that not only ensure that Meggitt maintains the significant presence but that the company can both accelerate and de-risk the excellent strategy that the company has, under CEO Tony Wood, achieved.
Meggitt is and will undoubtedly remain one of the world’s foremost aerospace, defence and energy companies – the differential of potentially being part of Parker-Hannifin in the future is not only that, as Meggitt CEO Tony Wood said this morning “opportunities for future growth, profitability and shared commitment to operational excellence” can be maximised” but also that the bringing together of Meggitt and Parker “will provide increased benefit to the UK with the provision of technologies, products and capabilities through Meggitt”. To that I would add that as a leading aerospace business itself, Meggitt can provide Parker with a new range of opportunities too particularly in the aftermarket.
But beyond all the operational and financial strengths provided by this agreed deal, the ability of Meggitt, an international group itself, to move forward on a position and platform of strength and with a company that from a strategic position fully endorses what it plans to do is one that also makes this plan compelling in every respect.
CHW (London – 2nd August 2021)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785