When it comes to specialty metal components manufacturer Precision Castparts (NYSE:PCP), it's really never a question as to whether management will do another deal. Rather, it's just a question of who the company will buy, how much it will pay and how successful it will ultimately prove to be.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments

Last week, though, management announced a real doozy - a $2.9 billion bid for titanium producer Titanium Metals (NYSE:TIE) (aka "Timet"). Although a large and expensive deal would be a significant risk for most companies, Precision Castparts is not like most companies, and I expect this deal will prove to be quite worthwhile for shareholders over time.

The Deal to Be
Precision Castparts has offered to pay $16.50 per Timet share in cash via a tender offer. Given the deal structure and the support of Timet insiders, there should be little risk to the deal going forward, though the companies have (wisely) chosen to create a 45-day "go shop window" to accept competing bids.

Assuming the acquisition goes on as structured, Precision will be paying a 43% premium to TIE's pre-deal closing price and about 12.5 times the average sell-side analyst estimate for 2012 EBITDA. That's definitely a premium to the going rate for other similar specialty metal or product companies like Allegheny Technologies (NYSE:ATI), RTI International (NYSE:RTI) and Carpenter Technology (NYSE:CRS), but not out of line with past specialty metal or material deals.

A Good Deal for Precision
Acquiring Timet makes complete sense for Precision, as it will further vertically integrate its upstream operations, adding titanium sponge, melt and mill capabilities. In many respects this deal is similar to the very successful past acquisition of SMC, where SMC added similar capabilities in nickel (though SMC was in worse shape at the time of Precision's acquisition).

All in all, acquiring Timet should make Precision a more effective competitor to Allegheny, as both will now have largely overlapping capabilities in nickel and titanium. At the same time, don't forget the current upswing in aerospace that is helping to drive this deal - Boeing (NYSE:BA) and Airbus use quite a lot of titanium in their planes, as do engine manufacturers like General Electric (NYSE:GE) and Rolls-Royce Group plc (Precision currently gets more than $7 million in content for GE-engined 787s).

Will This Deal Shake Things up Outside the Two Companies?
On balance, I would think that major customers like Boeing and GE would have relatively few objections to this type of deal - suppliers undertaking vertical integration can lead to stronger bargaining positions, but it also tends to make them more reliable and better able to respond quickly to new product needs/demands.

For other specialty material companies, it will be interesting to see how this deal plays out. I doubt that Allegheny is going to make any sort of competing bid, and it's hard to see them winning a bidding war if they did.

At the same time, this could go in the books as a lost opportunity for Alcoa (NYSE:AA) to reposition the company for the long-term. Alcoa's Engineered Solutions is likewise a significant player in aerospace components, and a deal for Timet could have been an interesting combination of titanium and aluminum capabilities (about 15% of the 787 Dreamliner is titanium, while 20% is aluminum). While Alcoa is not really in the best situation to be making a $3 billion bid for Timet, it would have nevertheless been interesting to see how such a combination could have improved that company for the long term.

The Bottom Line
Precision Castparts has a long history of identifying good acquisition targets, closing the deals, integrating the companies and driving significant synergies and long-term benefits. I expect the same to be the case here with the Timet deal. I suppose there's some medium-term risk to the deal if another global economic slowdown hits the commercial aerospace segment, but I believe that would be much more likely to delay, not cancel, the commercial aerospace ramp.

For Timet shareholders, it's perhaps unfortunate that they're not getting PCP shares in the deal. In fact, it wouldn't shock me if the timing of the deal was motivated in part by upcoming tax changes that will impact the insiders that own so much of the company. In any case, getting a reasonable premium (albeit a price well below the 2006-2007 highs) is not a terrible outcome.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    Will WYNN Continue to Rally?

    Wynn Resorts has experienced a rally recently. Will it remain a good bet?
  2. Stock Analysis

    Don't Be Fooled by the Market's Recent Rally

    The bulls won for a bit in early October, but will bears have the last laugh?
  3. Stock Analysis

    Will Twitter's Stock Find its Wings Soon?

    Twitter is an enigma to many investors, but its story is pretty straightforward.
  4. Stock Analysis

    8 Solid Utility Stocks for a Bear Market

    If you're seeking modest appreciation, generous dividend payments and resiliency, consider these eight utility stocks.
  5. Stock Analysis

    Why Phillips 66 (PSX) is a Solid Long-Term Bet

    Here's why Phillips 66 will likely remain one of the world’s largest and most profitable companies for a long time to come.
  6. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  7. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  8. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  9. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  10. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!