Boeing and Spirit: Dividing a Struggling Supplier

Discover how Boeing and Spirit AeroSystems collaboratively addressed challenges faced by a key supplier in the aerospace industry. This summary delves into their strategic partnership, detailing the division of responsibilities and resources to stabilize operations, ensure continuity in aircraft production, and maintain industry standards. Learn about the intricacies of their cooperation and the impact on the broader aerospace market.

Boston Brand Media brings you the latest news - Negotiated through three-way discussions involving aircraft manufacturers and a crucial supplier, Boeing's $4.7 billion agreement to repurchase Spirit AeroSystems is an uncommon triangular deal stemming from a crisis.

According to those familiar with the negotiations, the merger, which had code names such as "Sphere" and "Sparrow," had been under development since at least September when Boeing provided financial support and commercial arrangements to aid Spirit in enhancing its operations.

However, efforts to address Spirit's long-standing quality and delivery issues came to a head on January 5, when an Alaska Airlines jet lost a panel mid-flight, halting production of the affected model.

The incident, caused by missing bolts in a Boeing plant after unidentified workers fixed flaws in a fuselage from Wichita, Kansas, intensified discussions between Boeing and Spirit despite existing tensions, leading to more in-depth talks within days.

"They had to address the immediate issues on the ground first, but within a week, formal discussions between Spirit and Boeing about a potential transaction began," stated a person familiar with the deal.

On March 1, Boeing confirmed these talks, surprising the markets and Spirit's other major customer, Europe's Airbus.

Boston Brand Media also found that, In 2005, Boeing sold its Kansas and Oklahoma plants for about $950 million to private equity firm Onex to meet return-on-asset targets. Since then, Spirit had diversified and secured new clients, resulting in the establishment of a 500,000-square-foot Airbus A350 composite-fuselage parts plant in North Carolina.

However, production struggled to ramp up as planned, resulting in high costs that pushed the new operations into the red and cast doubts on the stability of the world's largest standalone aerostructures firm, according to analysts.

Europe's leading planemaker had also been negotiating with Spirit for months to enhance the efficiency of its loss-making operations that supply A220 and A350 jetliners.

After Boeing announced its bid, Airbus had to quickly revise its strategy, firmly protecting two key plants: the factory in Kinston, North Carolina, where robots assemble parts of the A350's composite body, and an A220 wings facility in Belfast, Northern Ireland.

Access to data on costs and strategic production decisions for its most advanced programs was at stake.

In an April interview with Reuters, Airbus CEO Guillaume Faury acknowledged the planemaker might have to absorb those plants but stressed that Airbus reserved the right to use a contractual veto to prevent sensitive work from being acquired by competitors.

Boeing had no interest in those two plants but negotiated over Airbus's request for compensation to cover Spirit's Airbus-related losses, estimated at $2 million per shipset for the A220, which are worth $7 million each.

Initially, Boeing resisted the idea, with a source suggesting the company would never pay to relinquish operations of strategic and industrial value to its rival.

Weeks of discussions led to a compromise addressing Boeing's concerns. Spirit agreed to pay Airbus $559 million and seek buyers for assets in Belfast, as well as operations in Prestwick, Scotland, and Subang, Malaysia.

Morgan Stanley was tasked with managing these asset sales to ensure the proceeds covered the $559 million payment to Airbus. However, some industry sources predicted challenging negotiations.

Airbus had to agree that it might have to take on those plants if no buyer could be found.

The final surprise in the talks was Boeing's shift from a cash buyback of its offshoot to an all-stock deal valued at $37.25 per share, up from the initial $35.50 per share offer.

Spirit, under pressure from outgoing Boeing CEO Dave Calhoun to finalize the deal before his departure at year's end, had to conduct due diligence on Boeing to ensure both parties were well-informed.

After initial hesitation, Spirit's board and Morgan Stanley approved the deal on Sunday. With rising projected demand for planes, Spirit's shareholders, excluding Onex which exited in 2014, would receive about $4 billion in stock to sell core Spirit factories and other assets back to Boeing.

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Source: Reuters‍