Via Financial Times

Hexcel and Woodward, two Boeing suppliers, have pulled the plug on their $6.4bn merger, becoming the first big deal to collapse due to the coronavirus pandemic. 

The two companies, which had agreed to combine in January partly to cope with the impact of Boeing’s grounding and halting production of its 737 Max aircraft, said that the market instability following the coronavirus outbreak made it harder to realise the benefits of the deal. 

“The termination was approved by the boards of directors of both companies and is in response to the increasing impact on both the aerospace and industrial sectors, and global markets broadly, resulting from the health crisis caused by the coronavirus (Covid-19) pandemic,” the companies said in statement on Monday. 

“The pandemic has resulted in a need for each company to focus on its respective businesses and has impacted the companies’ ability to realise the benefits of the merger during these unprecedented times,” they added. 

Several agreed mergers and acquisitions have fallen into limbo in recent weeks, as government actions to curtail the coronavirus outbreak have wreaked havoc in global markets and forced many companies to reconsider their priorities. 

Raytheon’s all-stock $120bn merger with United Technologies, two companies also hit by Boeing’s woes, was approved last week after some concerns it could be delayed due to the impact of coronavirus. Meanwhile, Boeing’s deal to acquire Brazil’s Embraer has stalled because of the market turmoil.

Cash deals are the ones at greatest risk, as buyers have seen the value of the companies acquired drop significantly below their agreed offer. 

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Hexcel and Woodward had agreed to an all-stock merger, which makes ending a transaction substantially easier as no financing is linked to the merger. 

“The move [to call off the merger] was not entirely surprising,” analyst Ken Herbert of Canaccord Genuity said in a note. 

“Both the supply and demand shocks to the commercial aircraft market have created much more distraction now, and require a focus on near-term cost actions and execution, as opposed to white-knuckling a merger on the scale of Woodward-Hexcel.”

Boeing’s struggles predate the pandemic. The company was dealing with the fallout of the worldwide grounding of its workhorse 737 Max following two crashes that killed a combined 346 people. It estimated the crisis would cost $18.6bn, and S&P Global Ratings has predicted the Chicago company will see a free cash outflow of $11bn this year.

Airlines and aircraft lessors are delaying or cancelling orders for Boeing jets, and the company has halted production at factories in Washington state and Philadelphia because of the virus. The Chicago company said on Sunday the factories in the Seattle area would remain closed indefinitely.

Hexcel said in Monday’s announcement that it had issued a shareholders rights dividend as a poison pill to guard against a hostile takeover.

The company’s “massive” reduction in share price, down 64 per cent from a 52-week high of $87 makes it an attractive target, Mr Herbert said. But until Boeing and Airbus give more information on their production plans, it is hard to value Hexcel, which derives nearly three-quarters of its revenue from supplying the aerospace manufacturers.

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 Hexcel had $64m in cash at the end of 2019 and no debt maturing until June 2024, “which gives the company a fair amount of breathing room to ride out the temporary effects of the pandemic”, Mr Herbert said.