Airbus Versus Sikorsky - Acquire Or Expire!

 

Airbus SAS: Overview

I personally have a lot of respect for Airbus. As a child, I spent plenty of time on planes that took me & my family all over Pakistan. Therefore, much like every frequent flyer in this country, I knew the cardinal rule of Pakistani air travel: Fokker flights were so turbulent that most people reached their destination half-dead from airsickness & Boeing planes were cramped & stuffy; but Airbus flights were a rare & precious joy - comfortable, spacious, airy cabins & seats that didn't feel like the electric chair.

Once I grew up & started understanding international commerce, my respect for Airbus grew even more. Despite not having the Hollywood appeal of American companies like Boeing & Lockheed Martin, it has managed to maintain a workforce of over 58,000 people, net annual sales of US$175 billion & has even recently bagged business contracts in China & India. One thing that both Europeans & Asians agree on is that there is no better plane manufacturer than Airbus.

The MRH90 Taipan Debate

However, Airbus has recently hit a very noticeable bump in the road: the Royal Australian Navy has announced that, after conducting the necessary tests, it has been proven that the MRH90 Taipans tend not to function reliably in strong wind conditions (as is common aboard ships at sea).

As it turns out, this is not a new issue: according to various think tanks, including the Australian Strategic Policy Institute (ASPI), this flaw has been an issue since Australia first introduced the MRH90 Taipans in 2005. ASPI & others go on to assert that the only reason that Australia has continued to stick with the Taipans, is because Airbus provides a sizeable number of jobs to Australians via its manufacturing facility in Brisbane. Opponents of this approach say that the only way to assure the efficiency of the Royal Australian Navy's maritime missions is to place safety statistics before employment figures & replace the MRH90s with Sikorsky's Black Hawk helicopters.

Sikorsky Aircraft Corporation: Overview

Sikorsky, on the other hand, could really use the boost that an Australian defense contract would give it. Its business model is actually as good as it was when Russian-American aircraft engineer Igor Sikorsky designed his flagship product, the Sikorsky R-4, in 1942, & it currently employs over 15,000 people while making net annual sales of US$7.5 billion; but the slump in oil prices (& exploration) that began in spring 2014, has badly compromised the company's bottom line.

Despite being the manufacturer of cash cows like the Black Hawk (the chopper of choice for the US Military) & Marine One (the US Presidential Helicopter), Sikorsky's financial condition has so deteriorated, that it has even begun to negatively affect the profitability of its parent company United Technologies Corporation (UTX), to the point that UTX's share price has been slowly circling the drain ever since oil prices started falling last year.

UTX, which employs over 211,000 people & made net annual sales of US$65.1 billion, has formally announced that it can & will rally from the setback of the last 12 months; but it can no longer afford the drain on its resources that Sikorsky is causing & so it is going to either sell or spin off its helicopter business. According to an official press statement from UTX, the final decision on the choice between a sale or a spin-off will be finalized by the end of this month.

Spin-Off Or Sale?

The dilemma lies in the fact that on one hand, a sale will cost UTX shareholders only US$0.10 per share in 2015 earnings, but it will be accompanied by a hefty tax payment; on the other hand, a spin-off would not incur any tax, but it would shave off US$0.20 per share in 2015 earnings.

In case UTX decides on a spin-off, the top candidate (so far) is Textron Inc. It is considered a direct rival to Sikorsky & is approximately double Sikorsky's size & value - it employs over 30,000 people & made net annual sales of US$12 billion. According to many analysts, the merger of two (bitter) rivals would not be viable under normal circumstances, but US legal experts say it is possible if the concerned parties make use of the "Reverse Morris Trust" provision in US corporate law, which is defined by Investopedia (investopedia.com) as follows:

"A tax-avoidance strategy, in which a corporation wanting to dispose off unwanted assets can do so while avoiding taxes on any gains from those assets. The Reverse Morris Trust starts with a parent company looking to sell assets to a smaller external company. The parent company then creates a subsidiary, & that subsidiary & a smaller external company merge & create an unrelated company. The unrelated company then issues shares to the shareholders of the original parent company. If those shareholders control over 50% of the voting right & economic value in the unrelated company, the Reverse Morris Trust is complete. The parent company has effectively transferred the assets, tax-free, to the smaller external company."

If, however, UTX decides to take the sale option, there are several potential bidders: the current list consists of Lockheed Martin, The Boeing Company & Airbus SAS.

Why Airbus?

Airbus shares have been on a steady decline since the last 3 months. If the Australian issue is not settled quickly, it is reasonable to assume that Airbus stock is going to lose further value. Therefore, the most sensible move Airbus can make is to convince UTX to take the sale option & outbid Lockheed Martin & Boeing to acquire Sikorsky. If Airbus can secure ownership of Sikorsky, it will be able to retain its Australian clientèle in the most efficient way possible: by profiting from giving the customer what he wants.