Precision Castparts Corp (PCP.N) offered $2.9 billion to acquire Titanium Metals Corp TIE.N, a leading maker of alloys used in jet engines and controlled by Texas billionaire Harold Simmons.
Precision Castparts, whose castings are used in every jet aircraft engine program in production or under development, said the acquisition of the titanium producer will help streamline its supply chain, reduce costs and boost earnings.
"(Titanium Metals) will provide us with the titanium capability that has always been a key missing piece of our overall product portfolio," Precision Castparts Chief Executive Mark Donegan said in a statement.
The company offered $16.50 per share for Titanium Metals, a 43 percent premium to the stock's closing price on Friday of $11.57.
Simmons' Contran Corp and affiliates, which hold about 45 percent of Titanium Metals, have agreed to support the deal.
Since Precision Castparts was Titanium's biggest customer, the cost reductions from the deal should be significant, analysts said. It also gives the buyer much greater exposure to titanium sales. And Precision Castparts has shown an ability to integrate acquisitions smoothly.
"If PCP is able to extract the value out of this, then in the long run, like you've seen with other acquisitions it's made, I think you can argue it will end up being a good deal," Ken Herbert, an analyst with Imperial Capital said.
Precision Castparts, based in Portland, Ore., makes castings, forgings, fasteners for aircraft and industrial gas turbines.
The acquisition follows a string of smaller deals, and expands its portfolio to include titanium sponge and melted products that are used in aircraft engine and airframe components.
Titanium Metals' is a maker of specialized alloys that are widely used in jet engines. Its customers include Boeing (BA.N), Rolls Royce (RR.L) and United Technologies' (UTX.N) Pratt & Whitney.
"It is a good acquisition," said Richard Whittington, an analyst with Drexel Hamilton. "Precision Castparts has a long history of handling supplier acquisitions very well and reducing costs."
This is Precision Castparts' biggest acquisition since at least 1996, according to Thomson Reuters data, and its seventh deal so far this year. Through deals, the company has expanded its product range and integrated vertically to include more production processes.
"That's been the history under Mark Donegan," said Peter Arment, managing director and aerospace and defense analyst at Sterne Agee in New York. "He's got a stellar track record" of improving synergies and running businesses efficiently.
Precision Castparts said it expects the acquisition to immediately add to its earnings.
"This transaction is truly a needle mover, a deal that offers Precision Castparts and our customers a wide range of opportunities going forward," CEO Donegan said.
Precision Castparts said it had lined up $3 billion in bridge financing that it said may be used to complete the deal.
The company will begin a tender offer for Titanium shares on November 20.
Dallas-based Titanium Metals said the merger agreement allows it to actively solicit other takeover bids for a period of 45 days. Morgan Stanley is acting as financial adviser to Titanium Metals. Simmons is a former banking examiner and financier.
Titanium Metals shares traded at $16.49, above the offer price, in after-hours trading, indicating that some investors expect a higher bid. Precision Castparts shares rose 4.3 percent after hours, from the close of $171.33.
(Reporting by A. Ananthalakshmi and Aurindom Mukherjee in Bangalore and Karen Jacobs in Atlanta; Editing by Maju Samuel, Alwyn Scott and Carol Bishopric)