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Why Boeing and KLX Stock Reacted Negatively to the Deal

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May. 4 2018, Updated 10:32 a.m. ET

Boeing’s and KLX’s market cap

On May 1, KLX (KLXI) stock closed at $71.50, down ~8.6% from the previous day’s close of $78.23. In intraday trading on May 1, the stock declined to $70.15, marking the biggest intraday fall in two years.

KLX’s market capitalization based on its May 1 closing price stood at ~$3.6 billion. Boeing (BA) stock declined 1.2% to close at $329.54 on May 1. The company’s market capitalization was ~$192.0 billion on the same day.

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Why KLX stock declined

It was widely anticipated that Boeing would retain the entire KLX entity, including its Energy Services segment. On December 22, 2017, KLX’s management announced a review of strategic alternatives for the company, which could include a sale. This spurred momentum in the stock, sending KLX stock up 9.0% on that day.

Boeing showed interest only in KLX’s Aerospace Solutions business, which is a strategic fit for its Global Services segment ambitions. The world’s largest aerospace company is picking up KLX’s Aerospace Solutions segment along with ~$1.0 billion in net debt. So, the only option left for KLX was to either sell or spin off its Energy Services segment to the stock owners. The company’s management chose the latter option.

KLX’s Energy Services segment offers technical services and related rental equipment to oil and gas (BHGE) exploration and production (SLB) companies. This segment has grown rapidly in terms of revenues, with revenues of $320.6 million in fiscal 2017. This represents 109.3% growth YoY (year-over-year).

However, the segment had an operating loss of $22.2 million in fiscal 2017, which combined with a questionable value realization after the spin-off pressured KLX stock.

Why Boeing stock slumped

Boeing’s $3.2 billion purchase price of KLX Aerospace Solutions comprised ~16.0x of the segment’s EBITDA[1. earnings before interest, tax, depreciation, and amortization] in fiscal 2017. The multiple represents a premium to the median of identical deals in the last five years, which is viewed as a very high price by market participants, resulting in a fall in BA’s stock price.

The ~$70.0 million annual cost savings until 2021 out of KLX’s integration with Aviall also pointed to the high price paid by Boeing for KLX’s Aerospace business.

In the next part, we’ll discuss the aerospace (LMT) suppliers sector.

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