Superior Aviation of Beijing May Acquire Hawker Beechcraft

 - August 1, 2012, 5:30 AM

A U.S. bankruptcy court has cleared the way for Hawker Beechcraft to begin “exclusive negotiations” for China’s Superior Aviation Beijing to acquire the civil aviation interests of the financially troubled group.

The approval followed by just nine days the announcement that HBC had reached a $1.79 billion “exclusivity agreement” with Superior Aviation that might conclude in its acquisition of the Wichita OEM. HBC filed for bankruptcy protection under Chapter 11 on May 3 this year, and the negotiations with Superior Aviation are part a process that includes sale of part or all of the company.

In the meantime, according to HBC, Superior will make payments over the next month to allow production of Hawker Beechcraft business jets to continue. An initial deposit of $25 million was required by July 20 and another $25 million was to be paid within 30 days.

The agreement would not include Hawker Beechcraft Defense Company (HBDC), which would continue to operate its T-6 trainer program as a separate entity. HBDC would also continue to pursue final certification of its AT-6, which is being considered by the U.S. Air Force for its light air support (LAS) program. The LAS contract has an initial value of $355 million and over time might be worth as much as $1 billion.

However, if HBDC should be sold separately, as much as $400 million of the anticipated $1.79 billion purchase price of HBC would be refundable to Superior.

According to Hawker Beechcraft CEO Steve Miller, Superior Aviation has had a long-standing interest in the commercial aircraft business of Hawker Beechcraft and first approached the company several years ago regarding a “strategic partnership.”

Miller also alluded to Superior’s previous experience operating a U.S. business and said the Chinese firm has a “demonstrated ability to restore a business to profitability quickly after emerging from Chapter 11.”

One of those U.S. businesses is the former Superior Air Parts of Coppel, Texas. In 2008 Superior Air Parts, a part of bankrupt parent Thielert Aircraft Engines in Germany, saw most of its assets sold to Lycoming and the remainder to a Chinese technology group, now Weifang Tianxiang Technology in partnership with the People’s Republic of China. According to Tim Archer, CEO of both Superior Aviation Beijing and Dallas-based Superior Air Parts, Superior Air Parts has been returned to profitability under Chinese ownership.

“At this time, pursuing the potential transaction with Superior is in the best interests of the company and its various stakeholders, including our creditors, our employees, our suppliers and our customers,” Miller added.

Wisely Buying While the Market Is Low?

Numerous analysts have described the $1.79 billon offer as “high.” On the other hand, said Douglas Royce of Forecast International in Newtown, Conn., “How often does a company get the chance to buy a line of certified piston, turboprop and business jet aircraft in one swoop?” He also pointed out that while it may take a while, “the business jet market will get better eventually [and] Superior is, perhaps wisely, buying while the market is low.”

When the consortium of Goldman Sachs and Onex purchased what is now known as Hawker Beechcraft from Raytheon in 2006, the price was $3.3 billion. The $1.79 billion Superior offer should also be viewed in the context of HBC’s financial health last September: $2.14 billion in debt and shedding $135 million annually in debt service.

Asked for his reaction to the news of the possible sale of Hawker Beechcraft, Cai von Rumohr, senior research analyst and managing director of Cowen Group financial service, replied, “Shock. First, that [Superior] would pay that much. Second, that it would continue the business jet lines. And third, that the alleged reason was to tap the Chinese market but keep all the jobs in the U.S.”

During a July 19 conference call with analysts and reporters to discuss Textron’s first-half 2012 financial earnings, CEO Scott Donnelly said that Textron is still in the hunt for all or part of HBC. “If it’s the right value and would be accretive for our business, then absolutely we’re interested,” he said. Cessna signed a preliminary agreement with Aviation Industry Corp of China (Avic) and the city of Chengdu earlier this year to open a factory to product midsize business jets for the Chinese market. If the HBC deal with Superior Aviation is consummated, it would place Superior in direct competition with Cessna for the Chinese market.

It remains to be seen whether there is any validity to talk that Superior is a so-called “stalking horse,” meaning that the negotiations are meant to encourage additional offers at a final auction.

HBC chairman Bill Boisture described the offer from Superior as “the most attractive we received during the strategic review process,” suggesting there were other less attractive proposals.

With HBC expected to produce approximately 100 King Air twin turboprops this year, von Rumohr said competitors Embraer or Cessna would have been happy to have that line, and HBC’s global service network would be an attractive addition to the Brazilian OEM’s rapidly expanding line of business jets. While Embraer as a foreign entity would be precluded from purchasing HBC’s defense business, Cessna might find it an attractive addition, he surmised.

Mahindra & Mahindra, India’s largest manufacturer of utility vehicles, is said to have considered a bid for HBC. “It would give them aerospace capabilities,” Dhiraj Mathur of PricewaterhouseCoopers told at the time. “They would be able to participate as an OEM and not a partner of an OEM.”

Mahindra has a major stake in Australia’s GippsAero, a developer of single- and twin-turbine utility aircraft, and has had talks with India’s National Aerospace Laboratories about partnering in a regional jet venture.

The negotiations with Superior prompted the International Association of Machinists and Aerospace Workers to express its displeasure by filing papers on July 16 with the bankruptcy court to block the sale.

“The proposed sale of Hawker Beechcraft to a Chinese government-backed entity has broad implications for the U.S. economy and national security,” said IAM International president Tom Buffenbarger.

IAM Aerospace coordinator Ron Eldridge took up the cause of the union membership, saying that the sale agreement “requires the termination of all three of Hawker’s defined benefit pension plans,” including the one for more than 3,500 IAM-represented members.

Both Hawker Beechcraft and Superior deny the union’s allegations. In announcing the deal with Superior, HBC chairman Boisture said that among the factors propelling the negotiations is recognition that Superior “offers the most continuity for our business, allowing us to preserve jobs, product lines and our ability to maintain our commitments to our customers.” (See sidebar story on page XX.)

And If the Deal Falls Through?

During the 45-day exclusivity period, Superior is performing “confirmatory diligence” as the two companies negotiate definitive documentation of the transaction. According to Hawker Beechcraft, should the transaction be completed, “Superior intends to maintain Hawker Beechcraft’s existing operations, while also investing substantial capital in the company and its business and general aviation product line.”

If the agreement is not concluded, Hawker Beechcraft has said it will move forward with the joint plan of reorganization it filed in bankruptcy court on June 30, “which contemplates Hawker Beechcraft emerging as a standalone entity with a more focused portfolio of aircraft.”

According to HBC in its executive summary of available options, in the worst case the “more focused portfolio of aircraft” could shut down the midsize Hawker 900 and super-midsize Hawker 4000 lines and halt development of the Premier-based Hawker 200.

Even if the agreement is concluded within the 45-day period, the sale of HBC to Superior is not “a done deal.” A “definitive agreement” would require approval of the bankruptcy court and would also be subject to a public auction process that means other entities would be entitled to submit bids. It would also be subject to approval by the Committee on Foreign Investment in the United States and other regulatory agencies.

Some analysts believe the HBC/Superior deal will never get that far. “I’m going on record to say that this deal won’t go through,” said George Tsopeis, v-p of operations at Zenith Jet forecasting and analysis in St-Laurent, Quebec. “I believe the Chinese will whittle down the price immensely to the point where the deal won’t make any sense to HBC.”

While Royce at Forecast International agrees there is some question as to whether the sale price is realistic, he notes that doubts about consummation of the Superior deal might be magnified by HBC’s current financial straits and the state of the aviation market in general right now. “Regarding buying an unprofitable company, we’ll have to see what happens to the company’s financial situation after bankruptcy. [Hawker Beechcraft has] been burdened by too much debt, and the cost of debt will likely be lower after bankruptcy. If it can better match costs with revenue, HBC would be in much better shape.”

In the meantime, said the company in a statement issued July 17, “We look forward to working toward a definitive agreement with Superior and continuing to educate all interested parties on the benefits of this agreement and the various mechanisms that are in place to ensure that it is in the best interests of our stakeholders.”