Playing the hits

Quick weekend thoughts on developments from a company, and a future company, that I spend way too much time thinking about around here…

TransDigm done did it again

We last discussed TransDigm back in February. This super-boring market-crushing stock continues to plod along out of the spotlight delivering software-like margins from old-school industrial aerospace businesses and generating piles of cash. As has always been the case over the past decade or so, I continue to hear talk of how the laws of big numbers are catching up with them. And the best days are over. You can’t roll up small companies with gems contained within forever.

Meanwhile, TransDigm stock is up more than 30% year to date.

As always, past performance is not a predictor of future returns. But the playbook — a private equity-style rollup and operations shop — continues to hum along. Earlier this May, CEO Kevin Stein said the M&A pipeline was unusually strong. The company has about $10 billion in capacity to do deals, and a real appetite.

Last week, TransDigm agreed to acquire Raptor Labs Holdco from private equity for $655 million in cash. This is vintage TransDigm. Raptor makes complex test and measurement gear used by aerospace and defense companies. Nearly all of its revenue is generated from proprietary products (criteria 1 in the TransDigm M&A book). Their issue has been how to scale and meet demand. Hello, TransDigm.

There’s an interesting side angle here as well. Stein is increasingly getting peppered about moving into new verticals, away from aerospace. One recent acquisition target, the Electron Device business of Communications & Power Industries, generates about 20% of its revenue from the medical industry. There is a lot of overlap between medicine and aerospace when it comes to electronics, sensors, and testing capabilities. Heico, the nearest public company comparison to TransDigm, has a growing healthcare business that helped the company offset sales declines in aerospace due to COVID.

Stein insists that TransDigm has no need to venture outside of aerospace. I believe he believes that. But there is a next big thing brewing here.

Who knows, perhaps this ride can’t go on forever. But I have no intention of disembarking any time soon.

“The Man” found his right-hand man

XPO Logistics, and specifically the man behind it, Brad Jacobs, has a big role in the origin story of this newsletter and of this investor. He’s part of the reason I spend time these days searching for other potential big winners hidden in plain sight.

Back in December, we talked about Jacobs’ next big thing. He even talked to me about it. QXO, as the company will be called (admittedly Jacobs’ Achilles heel could be naming things), will be built as a rollup of building products distributors, including construction materials, plumbing supplies, and HVAC equipment. He and a group are putting up $1 billion for growth and has a list of about 20,000 potential targets spread over North America and western Europe.

We have two developments to report:

First, shareholders of the company that Jacobs is merging with/acquiring to gain a public listing, Silversun Technologies, have approved the transaction. We’re still a ways away from the deal closing and QXO getting that listing, but this was a big step forward.

I’ve said before, don’t buy Silversun. Unless you really like the shell of a consulting business it is now prior to the merger. When the deal closes current Silversun holders will get a tiny bit of cash, a stake in the consulting business as it is spun out on its own, and a fraction of a share of QXO. If QXO is what you want, just wait and buy it when it becomes available on public markets.

The second update is really fascinating. Jacobs has found his right-hand-man to make the M&A machine work. QXO has hired long-time investment banker Ihsan Essaid as chief financial officer. Essaid is currently the head of global M&A at Barclays and has previously worked at Credit Suisse and BofA. He also spent time at a shop that is near and dear to my heart, Perella Wienberg Partners.

Rollup stories are risky because acquisitions are risky. I’m not sure it is true that most deals end in failure, as the popular adage on Wall Street goes. But I am pretty sure a good number of them underwhelm. The best way to offset that risk is to make dealmaking a core competency. To have a collection of people who know how to make deals.

Jacobs is one of those people, at least for me, and his track record supports my opinion. Bringing in Essaid is another plus.

I expect to hear about QXO’s first acquisition perhaps before the Silversun deal closes and we have a stock to talk about. There are no guarantees in life. QXO could fail to deliver. But I continue to find this story intriguing.

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