Heroux-Devtek makes first European acquisition with $128 million deal in U.K.

MONTREAL - Canadian aerospace manufacturer Heroux-Devtek has made its first major acquisition since selling its aerostructure business 17 months ago, purchasing a British landing-gear company for $128 million.

The Montreal-area company said the purchase of APPH from BBA Aviation PLC will expand its manufacturing reach in Europe, diversify its customer base and give it a greater presence in the lucrative repair and replacement part business.

"The acquisition of APPH brings significant and immediate strategic benefits to Heroux-Devtek, while strengthening its global competitive position and status as a leading landing gear system provider for aircraft weighing less than 100,000 pounds," Heroux-Devtek CEO Gilles Labbe said in a conference call from Britain on Monday.

Based in Longueuil, Que., Heroux-Devtek is acquiring four plants in the United Kingdom and one in Wichita, Kan., a key centre for business jets in North America. The APPH plants have a combined workforce of about 400 employees.

Heroux-Devtek's (TSX:HRX) shares hit a 52-week high of $11.74 in early trading Monday and were up 88 cents or 8.2 per cent at $11.60 in the afternoon on the Toronto Stock Exchange.

Labbe said the company expects to realize an unspecified amount of cost savings as it integrates the operations into its own network.

"We are confident we can extract some significant synergies during that transition and also this will position us very well in Europe and Canada and the U.S. to cover all the customers around the world," he told analysts.

The acquisition will increase Heroux-Devtek's revenues by about 30 per cent with the addition of US$77 million of APPH revenues last year and US$12.5 million in adjusted pre-tax operating earnings.

That will partially replace the US$130 million of revenues that were lost with the August 2012 sale of its aerostructure and industrial products division to Precision Castparts Corp. of Portland, Ore. (NYSE:PCP) for $300 million.

Heroux-Devtek sold the division to concentrate on its core landing gear operations. APPH specializes in the design, engineering and manufacturing of landing gear, hydraulic systems and assemblies for European military and global civilian aircraft.

APPH's proprietary products and after-market parts and service will help to provide more balance and generate more stable and higher revenues and earnings than Heroux's operations, which are more focused on building systems for aircraft manufacturers, including Bombardier, Boeing, Embraer and Dassault.

Labbe said the company will now take a pause from additional acquisitions while it integrates APPH over the next two years and also supply complete landing gear systems for Boeing's 777 and 777X aircraft.

Cameron Doerksen of National Bank Financial said the APPH acquisition is a "perfect fit" for Heroux-Devtek. APPH operates in Heroux's core landing gear segment, has a high degree of higher-margin proprietary products and a good mix of revenue, including aftermarket sales.

The key proprietary programs included the Hawk jet trainer, which accounts for 20 per cent of sales, the SAAB Gripen fighter and AW101 helicopter. In fact, proprietary products will contribute one quarter of overall revenues, up from 11 per cent before the transaction.

While APPH has similar mix of commercial and military business, Heroux is mainly exposed to the U.S. military.

APPH is also focused on Britain and Europe.

Doerksen raised his target price for Heroux-Devtek 18 per cent to $13 on anticipation that APPH will add 10 cents per share in earnings.

Heroux-Devtek reports its third-quarter results on Friday. It is expected to record nine cents per share in adjusted profits on $60 million of revenues, compared with 11 cents per share on $61.74 million a year earlier.