Boeing uses its clout to control supplier consolidation

Sun Aug 30, 2015 1:28pm EDT
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By Alwyn Scott

NEW YORK (Reuters) - Berkshire Hathaway Inc's $37 billion deal for aerospace supplier Precision Castparts Corp is encouraging investors to consolidate the fragmented aircraft components industry, even as Boeing Co uses its clout as the world's biggest plane maker to put a check on some deals.

Berkshire chief Warren Buffett isn't alone in seeing potential for profits from rising demand for commercial aircraft. Private equity and strategic buyers have been pouring into the sector, and foreign companies such as China's AVIC and Senior PLC of the UK have recently been prowling for deals, bankers and company executives said.

Potentially standing in their way, though, is Boeing, these people said. Boeing is the biggest customer of most aerospace suppliers, and is slowing some acquisitions by using its power to approve the transfer of its supply contracts from one owner to another.

Boeing can act like as an unofficial regulator on aerospace mergers and acquisitions because of the "assignability clause" inserted in most of its contracts with suppliers. The clause allows Boeing to refuse to transfer the contracts to the new owners, giving it a de facto veto over deals.

Boeing said it hasn't changed the process it uses to scrutinize mergers and acquisitions among suppliers, and that the time taken depends on the size and complexity of the deal. Chief Executive Dennis Muilenburg, who took over July 1, is continuing predecessor Jim McNerney's policy of "de-risking."

"We have an ability to have our voice heard in the M&A process and we use that ability," said Kent Fisher, vice president and general manager of suppliers at Boeing Commercial Airplanes.

But bankers and company owners said approvals from Boeing that used to take a couple of weeks now take much longer, putting deals at risk, with no explanation from Boeing for the delay.

"Any time you have a pause in a transaction, it increases the risk that it won't get across the finish line," said Brian Murphy, a managing director at Meridian Capital, an investment bank based in Seattle.   Continued...

The Boeing logo is seen at their headquarters in Chicago, April 24, 2013. REUTERS/Jim Young