TransDigm is a major supplier of aircraft components for use on nearly all commercial and military aircraft in service today. Major product offerings include mechanical/electro-mechanical actuators and controls, ignition systems, and engine technology, specialized pumps and valves, power conditioning devices, specialized AC/DC electric motors and generators, NiCad batteries and chargers, latching and locking devices, cockpit security components, cockpit displays etc.
Esterline is a supplier to the aerospace and defense industry specializing in three core business segments: Advanced Materials; Avionics & Controls; and Sensors & Systems. TransDigm views this as highly complementary to its existing business. The transaction is expected to close in the second half of calendar 2019.
The rationale for the acquisition is that Esterline will expand TransDigm's product offering, including significant aftermarket exposure. Esterline has attractive platform positions in both the OEM and aftermarket and has substantial content on many important commercial aircraft variants, many regional and business jet aircraft and major defense platforms. Furthermore, Esterline's core aerospace & defense business consists of primarily proprietary, sole source products with significant aftermarket exposure.
In sum, this deal was not entirely a surprise as there was a WSJ report in July that Esterline was considering a sale. The deal makes a lot of sense for ESL shareholders as a 38% premium is quite healthy. Also, it's a 63% premium from when that WSJ report was published in mid-July. The stock was trading at $75 at the time, so a $122.50 all-cash deal is a soaring return in less than three months.
TransDigm is trading lower on the news, not a huge sell-off, but down about 4%. It's not a dilution concern as this is an all-cash deal. Perhaps investors are disappointed with the premium that TDG is paying to acquire ESL. However, TDG shareholders have to understand that ESL may have been courting other suitors and perhaps TDG knew it had to come in strong. Regardless, this seems like a good deal for TDG in the long term. It seems like a nice fit and customers tend to prefer fewer suppliers, and TDG is a lot bigger now.