In the biggest aviation deal of the year so far, Iowa-based aerospace firm Rockwell Collins has purchased ARINC from the Carlyle Group, the world’s second biggest alternative asset management firm. The deal, which was orchestrated by Rockwell Collins’ new CEO Kelly Orthberg, provides the firm with a much-needed cushion against impending reductions in spending by the US military.
“ARINC operates in the heart of where we see the industry going,” Orthberg told shareholders. “Strategically, this acquisition is a natural fit.”
At present, around 85 percent of ARINC’s revenues derive from commercial clients. This means after the acquisition, Rockwell Collins business mix will shift in that direction, too – reducing its government contracts from 52 percent of all business to just 46 percent. Analysts suggest the change in strategy is a wise one, as US military spending is set to be cut by almost $500bn over the next decade. As a part of the sequester cuts that took place earlier this year, that figure is likely to increase even more.
Yet aside from protecting Rockwell Collins from a potential slump in government sales, ARINC’s niche communication technologies should also help its new owner to step out of the cockpit and advance its domination over the global aviation communications industry.
“We’re excited to be joining a company who shares our vision and focus on providing trusted solutions for our customers,” ARINC boss John Belcher said on the company’s website. “Rockwell Collins’ expertise in managing information on-board the aircraft, coupled with our innovative and reliable air to ground communications services, will be instrumental in providing new integrated information management solutions for our customers.”
At present, Rockwell Collins’ expertise lies in flight-deck avionics, cabin electronics, mission communications and other various information management systems. ARINC, which dabbles in the nuclear and rail sectors as well as aviation, will provide Rockwell Collins with a unique opportunity to significantly diversify its output.
“I’ve said that one of my primary areas of focus is to accelerate our return to growth, and that we intended to supplement our organic revenues with acquisitions,” says Orthberg, who’s only been on the job since August 1. “Our capital deployment strategy has always been to preserve enough firepower to be able to do a larger acquisition if the right opportunity presented itself. Well, that time has come.”
The timing of the deal suited ARINC’s former owners, too. In 2007, the Washington-based Carlyle Group purchased ARINC from a consortium of airlines including Continental, Delta and American Airlines. The terms of the deal weren’t disclosed, but it’s likely Carlyle got a bargain. It is now being estimated the firm will earn a fourfold return on its equity investment in ARINC, marking a graceful exit from the transportation communication business. In the second quarter alone, the Carlyle Group made nearly $4bn through various exits and portfolio sales, and last week co-CEO Bill Conway said Carlyle would continue tapering such investments in the second half of 2013. Other managers appear likely to follow suit, and Orthberg hinted that after this acquisition, Rockwell Collins will likely shy away from pursuing any other major deals in the mid-term.
