BUSINESS

Aerospace firm Heroux-Devtek sells chunk of business to focus on landing gear

07/17/2012 07:56 EDT | Updated 09/16/2012 05:12 EDT
MONTREAL - Quebec aerospace manufacturer Heroux-Devtek Inc. will focus on its landing gear division with the $300 million sale of about one-third of its business to a U.S. firm in a cash deal that sent the company's stock soaring on Tuesday.

Shares in Heroux-Devtek (TSX:HRX) jumped 32 per cent, or $2.50, to $10.35 on the Toronto Stock Exchange. Earlier they traded as high as $11.75 and beat a record high of $10 per share set at the end of 2001.

Precision Castparts Corp. of Portland, Ore. (NYSE:PCP), will acquire Heroux-Devtek's Aerostructure and Industrial Products division, which had about $130 million of annual sales — about one-third of its total revenue.

Chief executive Gilles Labbe said Heroux-Devtek will focus on growth and possible acquisitions in its landing gear business.

"Our vision is to continue to build Heroux-Devtek into a Quebec-based world-class organization in this core market," Labbe told analysts on a conference call to discuss the deal.

Heroux-Devtek is one of the Canadian companies that's involved in the Lockheed Martin F-35 jet fighter program, a multi-country initiative led by the United States, which has faced cost and timetable overruns.

"We are big players in the F-35," Labbe said of the radar-evading fighter jet.

"We design and build all of the outlook system for the F-35 in Canada and we also build some structural components in Canada, but of course our structure business will be sold. So all of the structure business we do on the F-35 will be taken over by Precision Castparts."

The Montreal-area company will remain significantly involved in the F-35 program through the landing-gear business that it's keeping, he said.

"I think we will look at other opportunities with Lockheed. I think we will continue to build this relationship."

Cormark Securities analyst David Newman said it was a good move to sell the products division to Precision Castparts, an established aerospace supplier.

"We believe the deal timing was ideal given the aerostructure business was potentially at the cusp of facing more pressure due to increasing scrutiny of Lockheed Martin's F-35 JSF program (cost overruns, etc.), while the industrial products business had almost fully recovered in terms of sales and solid margins following the recession," Newman wrote in a research note

Precision Castparts chairman and CEO Mark Donegan said the acquisition builds on its aerostructures business and will increase his company's reach.

"In addition to serving our current customer base, Heroux-Devtek strengthens our presence with such key customers as Lockheed, Bombardier, and Gulfstream," Donegan said in a statement.

Meanwhile, Heroux-Devtek's Labbe said there are opportunities to increase growth in the landing gear division and the company will be in a stronger position to do so as a result of the sale of its other division.

"It will be a more pure play in the aerospace business and a niche market also. We will develop more and more engineering products in the aerospace sector," he said.

"We found a way to unlock shareholder value and now we will concentrate on what we know best. The business that we are keeping represents two-thirds of the revenue."

But Cormark's Newman also said while Heroux-Devtek will focus on the landing gear market, he didn't rule out the company selling it, too, to generate more value for shareholders.

"Ultimately, we believe the remaining landing gear business could be sold," he said noting the division has generated about $250 million in sales and 55 cents to 60 cents in earnings per share.

After the sale, Heroux-Devtek will have more than 1,000 employees in Canada and the United States with about $250 million of annual revenue.

Labbe said related landing gear products such as gear retraction systems and flight controls can be developed by the company's engineers and sold.

The deal affects Heroux-Devtek's aerostructure and industrial products locations in suburban Montreal, Mexico, Texas and Ohio that employ about 440 people in total.

Labbe said Precision Castparts Corp. wants to make the aerostructure components and industrial products division a world leader.