Woodward Governor, Fort Collins, Colo. Chad Collins / BizWest

Woodward and Hexcel merger chasing tip-to-tail manufacturing strategy in planes and turbines

FORT COLLINS — The $6 billion tie-up between Fort Collins-based Woodward Inc. (Nasdaq: WWD) and Stamford, Connecticut-based Hexcel Inc. (NYSE: HXL) seems to follow a recent strategy for aerospace companies as of late: Make as much of the plane as possible.

The merger, announced Sunday afternoon as an all-stock deal, is one of a string of combinations in the aerospace industry in recent years, all seeking to supply more and more parts of a single plane, and to make that plane guzzle less fuel.

The new company, to be named Woodward Hexcel, will make its headquarters in Fort Collins. Woodward said it has no immediate changes to make among its 1,712 employees spread across its four Northern Colorado locations, and Hexcel won’t make any changes in the near term to the 100 people in its Windsor plant.

 

Aerospace mergers galore

Aerospace and defense companies have been hunting for scale in the past several years, often with billion-dollar valuations.

Northrop Grumman Corp. (NYSE: NOC) acquired Orbital ATK Inc. in 2017 for $9.2 billion as part of the former company’s efforts to pair its weapons business with a larger aerospace footprint.

In 2018, United Technologies Corp. closed a $30 billion acquisition of Rockwell Collins, a maker of plane electronics and interiors. The two companies combined make almost every part needed to assemble a plane, save for the plane shell itself.

A year later, United Technologies got shareholder permission to merge with defense behemoth Raytheon Co. (NYSE: RTN) in a $135 billion deal, which, if approved by regulators, would create the second-largest aerospace company in the world behind The Boeing Co. (NYSE: BA).

Richard Aboulafia, vice president of analysis at the Teal Group, said the Woodward-Hexcel tie-up would make sense from a vertical integration standpoint as the industry consolidates further.

“I understand the logic of size in our business … it’s only growing, the importance of growing,” he said.

That pressure to merge and survive is compounded by Boeing’s grounding and suspending production of its 737 MAX jets after two of the planes nosedived and killed 346 people in two separate flights in 2018 and 2019.

Boeing and its European competitor, Airbus SE (ENX: AIR), form a near-duopoly of the commercial jet market, and hundreds of aerospace suppliers have scrambled to stay afloat after essentially half of their customer base stopped buying parts.

Aboulafia said that crunch on suppliers gives companies incentive to expand their sales portfolio.

A slide from a joint investor presentation from Woodward Inc. and Hexcel Inc. showing various parts of a plane that the two companies currently make. Courtesy Woodward Inc.

That point is made clear by a slide in the two companies’ presentation to investors and analysts Sunday night that showed 18 separate plane components that the combined company would produce.

About 15 percent of Woodward’s revenue in fiscal year 2019 was from Boeing, according to its most recent filings, while almost 68 percent of Hexcel’s $1.628 billion in fiscal year 2019 net sales came from its commercial aerospace division.

In response to an analyst question during a Sunday night investor call, Hexcel CEO Nick Stanage said both company portfolios are “huge” and was confident that it could manage the Boeing crisis’ downstream effects with revenue from other commercial and military jet makers.

“We’re going to move right through the disruption on that program,” he said.

 

R&D for climate change?

In a Sunday night presentation to investors and analysts, the two companies said it would commit about $250 million in its first full year together on research and development.

“Woodward and Hexcel are working to support the drive to develop more environmentally friendly air travel and power generation as fuel efficiency and lightweighting continue to gain urgency and greater importance with our customers,” Stanage said.

Air traffic is one of the leading creators of greenhouse gases. The United Nations estimates that the industry released 900 million metric tons of pollution in 2018 and could triple by 2050, while other organizations claim that figure is far higher.

The trend of “flight shaming,” or feeling guilty for flying on an environmentally unfriendly plane, has grown in recent years. Analysts at Citi suggested last year that customers looking for alternative forms of travel could soon cost airlines $3.8 billion per year.

John Farnsworth, an aerospace engineering professor at the University of Colorado Boulder, said the aerospace industry is under pressure to make more fuel-efficient planes not only because jet fuel is one of the largest costs to airplane operators, but also because there is no current alternative fuel or electrical source with the energy density needed to sustain a commercial flight.

Even though NASA is in the beginning phases of electric propulsion research, he said the aerospace industry tends to be conservative on developing and releasing new products. That speed would delay new technologies from powering everyday forms of flight.

“You’re still probably talking at least 10 years until you see it implemented,” he said. “So fuel conservation and energy efficiency is necessary, even to bridge anything that is discovered and implemented in the future.”

However, Aboulafia doesn’t think that climate change had any impact on the thinking behind the merger because the aerospace industry as a whole is under pressure from customers to deliver planes that cut down on fuel costs over its service life.

“Jet aviation needs to get better to the tune of 1 percent (more fuel efficiency) per year, and it has been doing that,” he said. “A merger has no role in that whatsoever.”

 

Wind synergies

Aerospace is the larger of Woodward and Hexcel’s businesses, but both have sizable positions in supplying the wind industry. Woodward produces power converters and control systems to get wind-generated electricity into the larger power grid, while Hexcel creates materials for use in wind turbines.

Jesse Broehl, a wind industry analyst at Guidehouse, said dealmaking in the sector slowed down from a high point in 2016 and 2017. 

Companies around the world are adjusting to phase-outs of government incentives meant to spur the industry to a point where it’s self-sustaining, and the industry is facing additional pressure from competitive solar energy prices.

One of the companies caught off guard by those factors was Senvion SA, a German wind-turbine manufacturer and a frequent Woodward customer that filed for bankruptcy last April.

Broehl said the merger’s strategy of combining production to make more parts of an airplane could also apply to making more parts of the wind turbine.

“If they believe that strategy makes sense for aerospace, why wouldn’t it also make sense for the wind market?” he said.

FORT COLLINS — The $6 billion tie-up between Fort Collins-based Woodward Inc. (Nasdaq: WWD) and Stamford, Connecticut-based Hexcel Inc. (NYSE: HXL) seems to follow a recent strategy for aerospace companies as of late: Make as much of the plane as possible.

The merger, announced Sunday afternoon as an all-stock deal, is one of a string of combinations in the aerospace industry in recent years, all seeking to supply more and more parts of a single plane, and to make that plane guzzle less fuel.

The new company, to be named Woodward Hexcel, will make its headquarters in Fort Collins. Woodward said it has no immediate changes to make among its 1,712 employees spread across its four Northern Colorado locations, and Hexcel won’t make any changes in the near term to the 100 people in its Windsor plant.

 

Aerospace mergers galore

Aerospace and defense companies have been hunting for scale in the past several years, often with billion-dollar valuations.

Northrop Grumman Corp. (NYSE: NOC) acquired Orbital ATK Inc. in 2017 for $9.2 billion as part of the former company’s efforts to pair its weapons business with a larger aerospace footprint.

In 2018, United Technologies Corp. closed a $30 billion acquisition of Rockwell Collins, a maker of plane electronics and interiors. The two companies combined make almost every part needed to assemble a plane, save for the plane shell itself.

A year later, United Technologies got shareholder permission to merge with defense behemoth Raytheon Co. (NYSE: RTN) in a $135 billion deal, which,…