(News Bulletin 247) – The aeronautical equipment manufacturer announced on Friday the project to acquire the actuation and flight control activities of Collins Aerospace, which constitutes its largest transaction since the acquisition of Zodiac Aerospace in 2018.

The major French aeronautical groups have an appetite for large-scale acquisitions. Last week Thales decided to buy the company Aerocomms, which specializes in secure communication systems for aircraft cockpits, for an amount of 1.1 billion dollars.

This Friday, the engine manufacturer and aeronautical equipment manufacturer Safran announced an even larger external growth operation, with the acquisition of the actuation and flight control activities of Collins Aerospace, an American group specializing in mechanical systems, interior equipment, avionics or even aerostructures and formerly called Rockwell Collins. It is now an integral part of the giant Raytheon Technologies ($67.1 billion in revenue in 2022).

This announcement is not a total surprise, Safran having confirmed last month that it had contacted Raytheon with a view to carrying out this operation following indiscretions from the Bloomberg agency.

The agency then mentioned an amount of 1 billion dollars. It will ultimately be much more since Safran mentions a figure of 1.8 billion dollars, the company’s largest acquisition since Zodiac Aerospace in 2018. This amount represents a multiple of 14 times the gross operating income (Ebitda) expected in 2024. By integrating synergies, this multiple drops to around 10.

Cost synergies at $50 million per year

Safran estimates that these synergies will reach a “significant” level between the different market segments (commercial and military aircraft, helicopters), with in particular cost synergies estimated at 50 million dollars per year at cruising speed, which would be put in place between 2025 and 2028.

“These would be linked in particular to economies of scale achieved in purchasing, complementarities in research and development, as well as the internalization of supply and production flows”, explained the company.

To these cost synergies will be added revenue synergies “generated thanks to integrated offers, the diversification of customers and geographical areas”, continues Safran. “These would continue beyond 2028 with the entry into service of next-generation aircraft in the middle of the next decade,” the group adds.

The activities acquired by Safran are critical for commercial and military aircraft and helicopters. They employ approximately 3,700 people and should generate in 2024 a turnover of approximately 1.5 billion dollars and an Ebitda of 130 million dollars.

Beyond the synergies, “Collins’ actuation and flight controls business would provide Safran with a full range of skills and products, making the group a leading player with an extensive portfolio of actuation and flight controls products,” the company said.

Worse than stock buybacks?

In addition, approximately 40% of the turnover of the businesses acquired from Collins Aerospace comes from service activities, “which generate particularly profitable income, and would reinforce the share of services in Safran’s activities”. Although the group never communicates their level, the margins of Safran’s after-sales services constitute the heart of the reactor of its very high profitability, because these services are indeed very profitable.

The transaction will also provide Safran with additional expertise in hydraulic and electromechanical actuation, which will be critical for the group’s future aerospace programs.

Safran intends to finance this operation using its available cash and expects to finalize it in the second half of 2024. The company estimates that the operation will have a beneficial impact from the first year on its earnings per share.

Still, the size of this operation is enough to raise eyebrows in the market. “We consider this announcement to be negative for Safran”, because this acquisition “probably pushes back potential share buybacks to the end of 2024”, explains Jefferies. The bank notes that at 14 times the Ebitda expected for 2024, the target is better valued than Safran (11.6 times the Ebitda, according to its calculations) and that these activities of Collins Aerospace present low margins, with an Ebitda margin expected at only 8.6% in 2024, according to our calculations.

For the time being, the Safran share is changing little, falling 0.52% to 140.72 euros around 9:20 a.m.