Today’s news: The Boeing/KLX merger was announced. Read the important caveat, below!
Boeing (BA) and KLX Inc. (KLX) have agreed that Boeing will purchase the Aerospace Solutions Group from KLX for a price of $63 per share in cash, which will go directly to KLXI shareholders. The second part of KLX – its Energy Services Group – will be spun off to shareholders. Both transactions are expected to take place in the third quarter of 2018. The deal was announced last night.
The description of the Energy Services Group within the press release sounds very appealing. It’s an oilfield service business that spans all major inland U.S. basins, will be run by KLX CEO Amin Khoury, and will launch debt-free with a cash infusion. Oilfield service companies are in the sweet spot among energy stocks right now, typically having more capital appreciation in the latter part of the energy stock cycle than E&P or refining & marketing companies.
The press release does not give a dollar value to the Energy Services Group, so it’s going to be a little hard to estimate the total value of this transaction for KLXI shareholders. Let’s get through today’s potential share price volatility, and I’ll pull up KLX’s former earnings report and get an idea of the value of the Energy Services group by comparing its earnings per share (EPS) and potential price/earnings ratio (P/E) to those of Baker Hughes, a GE co (BHGE) and Schlumberger (SLB).
I virtually always advise investors to sell upon receiving buyout offers. However, I admit that owning a debt-free oilfield service company in today’s stock market is enticing. I’ll make my recommendation within a few days, and it will probably be something like this: “I’m removing KLXI from the Growth Portfolio. I expect the third quarter spin-off to be a desirable transaction. Growth stock investors who are not overweight in energy stocks should consider holding KLXI in order to receive the third-quarter stock spin-off and cash distribution.”
Caveat: Reuters news agency was reporting this M&A transaction incorrectly last night. Reuters reported the $63 per share purchase of the Aerospace Services Group, but left out the information about the spin-off of the Energy Services Group. That left readers with the impression that the entire transaction is worth a total of $63 per KLXI share.
Investors and traders who take action upon that mistaken belief could cause downside volatility in the stock today. The market will naturally right itself thereafter, as investment professionals assess the true situation.