TransDigm To Divest SCHROTH Business After DoJ Inquiry

TransDigm Group Incorporated TDG has decided to divest the SCHROTH business. The company had earlier announced that the U.S. Department of Justice (DoJ) had been investigating its acquisition of SCHROTH seatbelt and restraints business, which the company concluded in February this year.

DoJ requires Transdigm to divest two businesses — SCHROTH Safety Products GmbH and SCHROTH Safety Products — that Transdigm acquired from Takata for $90 million.

The DoJ had challenged the acquisition on grounds that the company had a uniquely substantial position in the aerospace seatbelts and restraints business. The DoJ insisted on the divestitures to restore competition in the market for certain restraint systems used on commercial airplanes as the acquisition would have eliminated Transdigm’s most significant competitor in the field.

In light of the size of the deal, and risks and expenses associated with carrying on the investigation, TransDigm decided that it would be more prudent to sell the business, thus avoiding any protracted dispute.

TransDigm conducted an extensive search and evaluation for a buyer, and is now selling SCHROTH Safety Products in a management buyout to Perusa Partners Fund 2, L.P. Perusa is a private equity fund advised by Perusa GmbH, as majority shareholder, as well as dedicated SCHROTH managers from both Germany and the United States.

The proposal has been accepted by the DoJ, subject to court approval. The deal remains subject to customary closing conditions and regulatory approvals.

TransDigm’s shares have suffered over the past year, having risen just 9.1% in contrast to the industry’s gain of 28.2%.

TransDigm continually adds to its product range with acquisitions of firms with proprietary products which enjoy solid positions on high use of platforms, robust aftermarket content and an excellent reputation. Products offered by the firms include highly engineered aerospace controls, quick disconnect couplings, as well as communication electronics.

TransDigm’s thriving aftermarket business continues to expand as a majority of aircraft bought during the financial crisis is beginning to age, and requires more frequent and comprehensive servicing.We believe stable aftermarkets, which have historically produced higher gross margins, will continue to drive financial performance for the upcoming quarters.

However, softness in business jet, helicopter and freighter revenues, have been hurting the company’s profits. The company expects that its gross margins will be affected in the upcoming quarters due to increase in interest expenses, which have been flaring up for the last few quarters.

In addition to this, weakness in the global macroeconomic conditions is thwarting air travel, adding to the company’s woes. Further, the company has some persistent concerns about the commercial transport industry in the upcoming quarters as well. These factors can play spoilsport for this Zacks Rank #3 (Hold) company in the near term.

Stocks to Consider

Some better-ranked stocks in the industry are Teledyne Technologies Incorporated TDY, Curtiss-Wright Corporation CW and Rockwell Collins, Inc. COL. While Teledyne Technologies and Curtiss-Wright sport a Zacks Rank #1 (Strong Buy), Curtiss-Wright carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Teledyne Technologies has a positive average earnings surprise of 37.2% for the trailing four quarters, beating estimates strongly all through.

Curtiss-Wright has managed to beat estimates each time in the trailing four quarters, for a positive earnings surprise of 11.8%.

Rockwell Collins surpassed earnings estimates in three of the trailing four quarters, resulting in an average surprise of 2.6%.

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