The implosion of Hawker Beechcraft’s proposed $1.8 billion sale to Chinese buyer Superior Aviation Beijing Co. – news welcomed by its unionized employees – is just one of several recent failed deals between U.S. and Chinese companies.
The deal blew up not because of price or any immediate legal impediment, according to sources familiar with the matter, but because of the complicated nature of the deal, much of which was related to the origin of the buyer. Not only was China besieged with harsh rhetoric from both sides during the second presidential debate, the U.S. has cracked down on some of Chinese-backed enterprises operating in the U.S., ostensibly chilling certain business relations between the two superpowers. Both labor concerns and the requirement that Superior sell Hawker’s defense business separately due to security restrictions may have created additional complexities in finalizing the deal, sources said, though there has been no explicit statement about what was the ultimate deciding factor.
Steve Miller, the turnaround specialist currently installed as Hawker’s CEO, said in a statement this week only that the transaction “could not be completed on terms acceptable to the company.” Further language in the release noted, “the parties could not reach agreement on the terms of a plan-sponsorship agreement.”
The company’s unions early on largely shaped the outcome of any Hawker restructuring deal. Hawker filed for Chapter 11 bankruptcy protection in May and announced in July that it was in exclusive talks with Superior regarding the purchase of the company’s non-defense division. But before Superior entered the picture, heated negotiations between Hawker and the International Association of Machinists and Aerospace Workers led to a pension plan modification that preserved members’ ability to retire under terms of the current defined benefit pension plan. When Superior and Hawker entered into an exclusive negotiating period, the details had not been finalized. Restructuring professionals not involved in the deal say there are not good comparable scenarios for Chinese buyers being able to come in and change labor agreements, which can often be a sticking point.
After the Superior deal was announced, IAM president Tom Buffenbarger made a public speech expressing the union’s desire to keep Hawker in the hands of U.S. owners.
When it was revealed yesterday the deal collapsed, IAM came out with a jubilant statement that no changes would be made to the company’s pension agreement. In the release, the IAM referred to the deal as “controversial” and called the head of Beijing-based Superior a “shadowy figure known as ‘China’s Helicopter King.”
The IAM appears to have gotten their wish, but at what expense? Hawker now intends to exit as a standalone company, more details of which it plans to file in court in the coming weeks. If Hawker cannot find a buyer, it is considering shutting down its jet business, according to the statement announcing the failed deal. Hawker said it instead will focus on making aircraft that use different technology such as, the “turboprop, piston, special mission and trainer/attack [models] – the company’s most profitable products – and on its high margin parts, maintenance, repairs and refurbishment businesses, all of which have high growth potential,” according to the statement.
How the term loan crumbles
Such uncertainty has demolished more than a fifth of the value of the term loan debt since before doubts started to creep in about the deal. The cov-lite TL was active yesterday, with bids hitting as low as 56, according to sources, and holders are still trying to figure out what it will be worth coming out of bankruptcy as a standalone company.
Hawker’s secured debt consists of a $1.42 billion term loan, $241.9 million on the revolver, and $38.9 million in a synthetic L/C strip. The four main holders of the term debt are Centerbridge Partners, Angelo, Gordon & Co., Sankaty Advisors, and Capital Research & Management. Private equity sponsors that are set to lose their existing equity stakes are GS Partners and Onex Partners.
As part of the conditions of the deal, Superior couldn’t buy Hawker’s defense business, Hawker Beechcraft Defense Co., because of security concerns. Superior is 60% owned by Beijing Superior Aviation Technology, an entity owned entirely by its chairman, Shenzong Cheng, and his wife, Qin Wang. The remaining 40% is owned by an entity controlled by the Beijing municipal government. Even so, the transaction was still going to need to be reviewed by the Treasury-led interagency Committee on Foreign Investment in the United States, or CFIUS.
Recently, this type of approval has become a more sensitive issue between the U.S. and China, with two rare examples of intervention by the U.S. government in business with Chinese companies: For one, last month, the White House blocked a plan by Chinese national-owned Ralls Corp. to build four wind farms near a U.S. Navy base, after CFIUS concluded it posed security risks. That company then went on to sue CFIUS and President Obama, according to court documents, with its CEO warning that the case would deter Chinese investment in the United States, according to news reports.
Then a recent report from the House Intelligence Committee brought up the issue of potential security issues with Chinese telecom Huawei, which installed gear to manage traffic on wireless networks in the U.S. The report noted the potential for spying through Huawei gear installed to manage traffic on wireless networks. The committee also criticized Huawei management for failing to provide details about its relationships with Chinese government agencies.
What’s more, Reuters reported that the White House had ordered a separate 18-month investigation of Huawei. The report found no instance of spying, but expressed concern about future risk, according to Reuters. – Max Frumes