Future looks good for Spirit Aerospace

Defense Market Report
Exclusively for InvestorIdeas.com
By James Smith
November 08, 2006

Spirit Aerosystems Holdings, a non-OEM designer and manufacturer of structural parts for commercial and military aircraft, announced the terms for its initial public offering (IPO) on October 30. The company is a subsidiary of Canadian buyout firm Onex Corporation.

The Kansas-based company plans to offer 52.1 million shares at a range of US$23-25, resulting in gross proceeds of between US$1.2 billion and US$1.3 billion. The deal includes a greenshoe option for an additional 7.8 million shares to be offered by selling shareholders.

Of the shares to be offered, 41.7 million are being sold by existing investors.

Spirit expects to raise US$229 million from the sale. The company plans to use about US$100 million of IPO proceeds for debt repayment and around US$129 million to fund its pension obligations.

After the IPO, parent company Onex will still own about 58.3 per cent of Spirit's common stock and hold 92.1 per cent of the company's voting power.

The IPO is expected to launch during the week of November 20. Credit Suisse, Goldman Sachs and Morgan Stanley will manage the deal.

The IPO was not unexpected. The company was established in 2005 when Onex bought the Wichita and Oklahoma assets of Boeing Commercial Airplanes in mid-2005 for US$904 million. Onex invested US$375 million of equity and Spirit took on US$700 million of debt. At the time of the buyout, Boeing agreed to buy three-quarters of the airframes for its best-selling B-737 program from Spirit. When the deal was announced, Onex officials said their plan was to take Spirit public within five years.

Onex makes few mistakes. At the time Onex bought the Boeing assets, the commercial aircraft market was still in a downturn, making other potential bidders leery of the deal. Now, airlines worldwide are replacing older aircraft and expanding. At the same time, Onex was able to achieve about US$200 million in cost-savings through workforce reductions and wage and benefit cuts while promising unionized workers a share in any upside.

One of the pluses to this deal is that, while several of Airbus’ commercial programs are faltering, Spirit provides fuselages, structures and wing components for every Boeing commercial aircraft in production except the B-717. Included in the Boeing line is the new B-787 Dreamliner, which is outselling by a 414 to 202 margin, the proposed A350XWB from Airbus. Because of the impracticality of changing suppliers, Spirit appears to be a long-term partner with Boeing.

The A350XWB program has been plagued by problems and the European plane maker was forced to redesign the aircraft after complaints from proposed customers.

While production of the B-787 appears to be proceeding except for a minor problem weight problem, the future of the A350XWB program is anyone’s guess. The first B-787 delivery is still planned for 2008, on time and in accordance with the company's contractual obligations.

In April, Spirit coughed up about US$142 million to acquire BAE Systems’ unit that makes wing parts for Boeing and Airbus.

While the BAE unit derives more than 80 per cent of its revenues from Airbus, much of that is tied to the company’s best-selling A320-family aircraft as well as the A330, A340 and troubled A380 programs.

Crystal ball gazers may wonder why Onex is selling. It is not a secret that the commercial aircraft business is a cyclical industry. But Boeing has a long order book and Spirit stands to profit from increasing appetite for new aircraft. In addition, the current up cycle is expected to last until around 2009, based primarily on new commercial aircraft models.

Spirit is also rumored to have bid for work from the Eurocopter division of EADS, parent company of Airbus. The company is also said to have received an order from engine maker Rolls Royce.

This year, Spirit expects revenues of US$3.3 billion, including US$300 million from the BAE Systems acquisition.

Spirit estimates that the market for its products is US$18 billion to US$20 billion a year. The market from Boeing alone is US$6 billion to US$7 billion a year.

Spirit is not keeping all its planes in one hanger. The company expects that by 2011, 20 per cent of its revenue will be from non-Boeing customers.

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