Superior bid?

US aviation firm pockets $50 million break fee

Superior bid?

For sale: Hawker Beechcraft

Only a couple of months ago, budding aviation entrepreneur Cheng Shenzong told 21CN Business Herald that he was sure that his plans to acquire troubled US aircraft maker Hawker Beechcraft would go ahead (see WiC160). The newspaper even described him as “smug” when talking about the Rmb11.4 billion ($1.82 billion) deal.

After all, Cheng had acquisition experience in the US, having bought a small manufacturer of aviation parts in Texas. His latest deal seemed like another case of a once proud company being scooped up by a Chinese counterpart.

But the Hawker Beechcraft bid has fallen through. The US firm says it will now slim down to survive as an independent firm, helped with the proceeds of its golden handshake from the frustrated bidder.

“We are disappointed that the transaction did not come to fruition, but we protected ourselves by obtaining a $50 million deposit that is now fully non-refundable and the property of the company,” Steve Miller, chief executive of Hawker Beechcraft, told the China Daily.

This deposit could prove costly for Cheng and his network of aviation companies, from which Superior Aviation Beijing was conducting the acquisition.

“If [Superior] has paid a $50 million deposit, this may be a fatal blow to Cheng,” an executive at a domestic airline told 21CN.

The deposit was part of a deal which guaranteed Superior a 45-day exclusivity period for the acquisition talks with Hawker, a maker of business jets which filed for bankruptcy earlier this year.

The failed deal has generated wider media interest in Cheng’s other business interests. For instance, there are new doubts about the health of Qingdao Haili Helicopter, the firm that gave Cheng his moniker of ‘the Chinese Helicopter King’. Haili was visited by a 21CN reporter in July, only to find the company apparently closed for business.

How did Cheng expect to pull off the much larger Hawker Beechcraft deal? The answer probably lies with one of Superior’s shareholders. Beijing Yizhuang, which holds a 40% stake in Superior is a financing vehicle owned by the Beijing Economic and Technological Development Zone, and was presumed to be underwriting much of the bidding capital.

But relying on a government backer may actually have undermined Superior’s bid for its US target, as it is just the kind of thing to raise suspicions with regulators, who were required to give the bid their final approvals.

These issues would have been especially sensitive during an election year in the US, with Hawker CEO Steve Miller admitting to Reuters that “global politics may have interfered”. Sang Baichuan, a professor at the University of International Business and Economics, seemed to agree, telling CNR.cn that Superior’s “background” meant that it had crossed a “red line” with US aviation regulators, especially in an industry in which technology transfer can be a prominent factor in any final decision. Notably, Hawker makes military attack jets too. This led the American International Association of Machinists and Aerospace Workers to file a motion to the US bankruptcy court, asking a judget to reject the acquisition on national security grounds.

But that may not have been the only problem. Superior apparently found US bankruptcy laws tough to get to grips with and may not have been able to demonstrate it had the funds on hand to complete the bid.

The deal’s failure could be a missed opportunity for both sides. Chinese demand for business jets accounted for 10% of global orders in 2011, contrasting sharply with a weaker environment in the US, where orders have declined since the financial crisis.

If the deal had gone ahead, Hawker was planning to exploit its acquirer’s connections to gain greater access to the Chinese market. Without Superior onboard, that looks like less of an option and the future of the business jet division looks uncertain.

“I don’t see any of the established players like Bombardier taking an interest in the segment,” Neal Dihora, an analyst at Morningstar told Reuters. “The prospective buyer would have to be a new entrant with deep pockets.

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