Continuing on acquisition path

Profile Meggitt

As the aerospace industry has steadily recovered from its most recent devastating downturn, the prospects for consolidation at Tier 1 and 2 level have consistently been in the spotlight.

UK-based Meggitt has been involved in the reshaping of the industry in the past, most notably with its acquisition of the design and manufacturing assets of Dunlop Aerospace in 2004. Now the company has contributed to the restructuring with its bold step to take over US-based aircraft braking specialist K&F Industries.

The move was greeted with unanimous approval by the financial community, with the only doubts - over whether the deal would be approved by competition authorities - dispelled on completion in June.

Now chief executive Terry Twigger is looking forward to the progress the two companies can make together.

Meggitt says the main reason for buying K&F Industries was to expand its product line. The company looked at K&F at the same time as the Dunlop deal and, as with that transaction, has added a respected brand name to its portfolio. Twigger says Meggitt will maintain the value of the brand, as it did with Dunlop.

Twigger

"Some brand names have an awful lot of customer acceptance. We will increasingly standardise, but it is a big deal to phase out long-standing brand names," he says.

A key strength is a diversified portfolio, and balance across the civil and military sectors, which each account for around 40% of the business, with its electronics division making up the rest.

Twigger predicts some adjustment of the manufacturing/aftermarket split as K&F becomes fully integrated. In 2006, 37% of Meggitt's total revenues came from the aftermarket, and 63% from sales to original equipment manufacturers. Following the acquisition of K&F, the company expects the percentage of annual revenue from the aftermarket will increase to 47%.

Another advantage of the K&F acquisition is the increase in US presence and therefore dollar-based manufacturing.

There are no imminent plans to change production locations, but "if one business has a real centre of excellence it could make sense to concentrate production there", Twigger says, acknowledging a "whole raft of issues", including the dollar/sterling exchange rate, could affect such a decision. Twigger is adamant Meggitt is not considering shifting production to the USA, but concedes the company is "fortunate that most of the production in Europe could be done in the USA if the exchange rate reached a catastrophic level and looked set to stay".

The company is tackling the issue of being based in an expensive location in other ways. Its Chinese factory in Xiamen, which began operations in June 2004, has doubled in capacity recently, and could see more growth if demand is sufficient. Twigger says Meggitt is aiming to source more production in Mexico and it outsources some engineering work to India.