Boeing has reached an agreement to acquire Spirit AeroSystems Inc. (Spirit) in a transaction valued at US$8.3 billion. Spirit shareholders will receive Boeing shares equivalent to $37.25 per share of Spirit stock, representing an equity value of approximately $4.7 billion. Boeing will also assume approximately $3.6 billion of Spirit’s debt.
The announcement does not affect S&P’s ‘BBB-‘ issuer credit rating and negative outlook on the company. We note that use of equity will lessen the negative effect of the proposed deal on Boeing’s leverage and reduces its sensitivity to weaker-than-expected cash flow generation on its credit measures over the next few years. The use of equity is a constructive change from the company’s original plan to fund a potential acquisition with all cash. The transaction as proposed will nevertheless result in incrementally weaker credit measures immediately after the close due to limited earnings contribution from Spirit and the assumption of its higher-cost debt.
We view the re-acquisition of Spirit as likely to improve Boeing’s product quality over the long term because of better integration of production oversight, though the acquisition introduces integration risk, particularly given the quality issues facing Spirit that need to be addressed.
Spirit is one of Boeing’s most important suppliers, making the fuselage for the 737 MAX aircraft. Boeing spun the company off in 2005. A series of manufacturing flaws on components made by Spirit last year resulted in delays and added costs to correct.
Spirit also makes components for Airbus, including for its A220 aircraft, as well as for defence applications. The acquisition agreement includes a provision that Spirit will divest the units that supply Airbus, Boeing’s key competitor. The transaction is subject to customary closing conditions and regulatory approvals, and is not likely to close before mid-2025.
We expect Boeing’s credit measures to be weak for the rating this year, reflecting subdued production and delivery levels as the company overhauls its MAX manufacturing process to improve quality and stability. Weak performance also incorporates the recently announced delay in aircraft deliveries to customers in China. These factors contributed to the company’s guidance that it will generate slightly negative free-cash flow in 2024.
We are focused on Boeing’s ability to produce and deliver higher levels of MAX planes in 2025 to maintain the rating. We could lower the rating if the company fails to increase airplane production and deliveries late this year and we do not believe there will be imminent improvement. This change would result in a corresponding delay in our expectations for a recovery of cash flow and its credit measures.
