Rockwell Collins making largest purchase as public company

The planned $1.39 billion purchase of ARINC Inc. of Annapolis, Md., by Rockwell Collins will be the largest acquisition by the Cedar Rapids-based avionics and communications provider as a publicly traded company.

The deal, which would be the largest aerospace and defense acquisition of 2013, was announced Sunday.

ARINC, formed by the nation's airlines in 1929 and sold to the private equity Carlyle Group in 2007, employs almost 2,000 people. The deal, expected to close in about 90 days pending regulatory approvals, will bring total Rockwell Collins employment to 21,000.

Kelly Ortberg, Rockwell Collins president and CEO, on Monday said ARINC's network and connectivity services will complement his company's hardware and avionics platform and business jet flight information systems.

"Clearly the value driver in this acquisition is ARINC's core aviation business," Ortberg said. "The company also extends its capabilities into nuclear power plant security as well as railway systems.

"Those are not core focus areas for Rockwell Collins, but they are applying their core competencies in adjacent markets. Provided they do that in a way that's accretive to the company, these can be nice opportunities for us to grow even further."

Ortberg said Rockwell Collins, founded in 1933, will finance the purchase of ARINC with debt, including one-third commercial paper and two-thirds long-term loans at historically low interest rates. The company expects to pay down the commercial paper over the next few years.

Moody's Investors Service reacted to Rockwell Collins' announcement by placing the company's investment- grade ratings on review for a potential downgrade.

The credit rating rating agency said while the pending acquisition appears to fit well with Rockwell Collins' hardware and avionics platform and business jet flight information systems, the all-debt financing imposes another layer of incremental financial risk.

Moody's also cited the company's substantial underfunded pension obligations and "a decided shift in fiscal policies over the past couple of years" including a bias toward shareholder-friendly moves such as dividends and stock buybacks.

With the purchase of ARINC, Rockwell Collins will shift its business mix to 54 percent commercial systems and 46 percent government systems. As government spending has contracted in recent years, the company has pursued more commercial business as well as stepping up its growth in international markets.

"My focus is going to be on accelerating the growth, and that's what this acquisition does for us," Ortberg said. "I have the full support of our board of directors to drive this growth opportunity forward."

Robert Stallard, a Royal Bank of Canada analyst, told clients in a note that the purchase of ARINC by Rockwell Collins "will provide a serious acceleration” back for a business tilted toward commercial sales. Stallard, according to Bloomberg News, said transaction and integration costs likely will dilute earnings per share in the company's next fiscal year.

ARINC is expected to post revenues in excess of $600 million this year. Rockwell Collins said last month that sales in its current fiscal year would be about $4.65 billion.

ARINC had been owned by American Airlines and other carriers since its founding in 1929 to handle air-to-ground communications. The Carlyle Group invested $257 million of equity when it bought ARINC in 2007 from the airlines and other aviation-related companies such as Boeing.

Ortberg said an integration team will be formed with ARINC's leadership to determine an organizational structure after the deal is completed.

"That does not necessarily mean major facility consolidation," he said. "ARINC will continue to have an operation in Annapolis, Md., where is it has its headquarters. There are some corporate functions where you don't need two, so it will be their corporate functions that will be integrated into our business."

ARINC was founded as Aeronautical Radio Inc. It was chartered by the Federal Radio Commission - predecessor of the Federal Communications Commission - to serve as the airline industry's single licensee and coordinator of radio communications.

Over the years, ARINC developed many of aviation communication industry standards. The company has two regional headquarters in London, established in 1999 to serve the Europe, Middle East and Africa region, and Singapore, established in 2003 for its Asia Pacific region.