SAN FRANCISCO (AFX) -- Aviall Inc. shares rallied 25% on Monday after Boeing Co. put its billions to work with a $48-a-share deal for the aviation-services and supply-chain specialist, a move that will boost the aerospace giant's non-aircraft-building business.
Boeing stock closed up 0.5% to $83.86 while Aviall jumped $9.26 to $46.96.
William Alderman, head of aerospace investment bank Alderman & Co., said it was a bold move for Boeing.
'It is clearly a statement that they are moving away from just making aircraft,' said Alderman.
For cash-rich Boeing, like other aerospace and defense firms, the deal puts money to work that could otherwise be returned to shareholders through measures like higher dividends or share buybacks.
'We expect BA to remain relatively deliberate on acquisitions, spending the majority of its cash on share repurchase,' UBS analysts wrote in a research note. 'With $10 billion in cash/investments, BA can afford to do this deal and still remain active on [the] share-repurchase front.'
At the end of the first quarter, Boeing had $9.8 billion in cash and investments, which was up 56% from a year ago.
In December, Boeing lifted its dividend 20%, after also boosting its payout a year earlier.
The $1.7 billion transaction, which is expected to close by Sept. 30, also sees Boeing assuming $350 million in Aviall debt.
Aviall does maintenance and repairs and is a parts distributor, operating an electronic marketplace for suppliers. It will operate as a subsidiary of Boeing Commercial Aviation Services.
Louis Mancini, vice president for commercial aviation services, said that the deal comes as Boeing's business managing parts for customers is taking off. Letting Boeing manage inventories means customers don't have to have big inventories or outdated equipment and can instead get what they need on an as-needed basis.
'What Aviall brings is a whole network of non-Boeing parts, which we can then provide as a bigger basket of parts to our customers,' said Mancini in an interview.
CIBC analysts called the deal 'nothing short of expensive' but said Aviall will boost Boeing's commercial after-market sales 30%.
Aviall revenue totaled $1.3 billion last year.
Airlines around the world are moving to outsource maintenance to specialized companies in order to cut costs, which in turn are looking to operate as efficiently as possible by using suppliers like Aviall, according to Alderman. And the use of replacement parts made by other companies than the original manufacturers is also part of this trend to hold down costs, he said.
'The real push here is globally Boeing wants the airlines and their maintenance providers, literally with a phone call or a click of a mouse, to get everything they need from Boeing,' said Alderman. This story was supplied by MarketWatch. For further information see www.marketwatch.com.