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Boeing ( BA ) agrees $4.7 billion deal to buy back Spirit

AeroSystems ( SPR )

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Airbus sought compensation to take over loss-making

activities

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Spirit to seek buyers for some assets to cover payment to

Airbus

By Mike Stone, Tim Hepher, Abhijith Ganapavaram

WASHINGTON, July 1 (Reuters) - Hashed out in three-way

talks between plane giants and one of their key suppliers,

Boeing's ( BA ) $4.7 billion deal to buy back Spirit AeroSystems ( SPR )

is a rare triangular deal born out of crisis.

The merger, variously code-named "Sphere" and "Sparrow," had

been in the making since at least September when Boeing ( BA ) was

offering financial support and commercial agreements to help

Spirit improve operations, people familiar with the talks said.

But last year's efforts to improve Spirit's quality and delivery

issues, a persistent problem for some years, reached a tipping

point on Jan. 5, when an Alaska Airlines jet lost a

panel in mid-flight, freezing output of the affected model.

The incident, linked to bolts going missing in a Boeing ( BA )

plant after unidentified workers addressed flaws in a fuselage

shipped from Wichita, Kansas, accelerated discussions between

Boeing ( BA ) and Spirit despite tensions - and within days led to

deeper talks.

"They had to deal with the problems on the ground first, but

then within a week there were formal discussions between Spirit

and Boeing ( BA ) about a potential transaction," a person familiar

with the deal said.

On March 1, Boeing ( BA ) confirmed the talks, catching markets and

Spirit's other key customer, Europe's Airbus, by

surprise.

Boeing ( BA ) had sold off Kansas and Oklahoma plants for around

$950 million to private equity firm Onex in 2005 to meet targets

for returns on net assets. Since then, Spirit had diversified to

find new clients. The results included a 500,000-square-foot

Airbus A350 composite-fuselage parts plant in North Carolina.

But as production failed to take off as planned, costs were

high, driving the new operations into the red and raising

questions over the resilience of the world's largest standalone

aerostructures firm, analysts said.

Europe's top planemaker had itself been in talks for months

with Spirit to help it improve the efficiency of loss-making

operations that supply its modern A220 and A350 jetliners.

Forced to rewrite its approach after Boeing ( BA ) revealed its bid

plans, Airbus quickly drew a red line around two key plants: the

purpose-built factory in Kinston, North Carolina, where

rail-mounted robots weave part of the composite body of the

A350, and an A220 wings facility in a plant in Belfast, Northern

Ireland.

At stake was access to data about costs and strategic

decisions about production for its most modern programs.

In an interview with Reuters in April, Airbus CEO Guillaume

Faury conceded the planemaker was likely to absorb those plants

but warned that it reserved the right to use a contractual veto

to prevent the sensitive work from falling into the hands of

industry rivals.

Boeing ( BA ), for its part, had no designs on those two plants but

the two sides haggled over the European firm's request for

compensation to take on Spirit's Airbus-related losses, which

were estimated as high as $2 million for each set of wings and

other parts for the A220, known as a shipset, worth $7 million.

Boeing ( BA ) initially chafed at the idea, with a person familiar

with the talks predicting the company would never pay to release

operations of strategic and industrial value to its rival.

What followed were weeks of discussions that delivered a

compromise designed to accommodate Boeing's ( BA ) concerns, the

sources said. Spirit would pay Airbus $559 million, while

looking for a buyer for some assets in Belfast as well as less

critical operations in Prestwick, Scotland, and Subang,

Malaysia.

Morgan Stanley is tasked with managing these asset sales,

ensuring proceeds cover the $559 million payment to Airbus. Even

so, some industry sources predict those talks will be tough.

For its part, Airbus was forced to agree that it may have to

take those plants anyway, if no seller could be found.

The talks held one final surprise. Boeing ( BA ) had insisted it

would buy back its offshoot for cash. But some analysts said

that meant a further strain on the debt-laden group's finances.

For months, Spirit had been under the spotlight, with

outgoing Boeing ( BA ) CEO Dave Calhoun pushing for a deal before he

was due to step down by the end of the year.

When Boeing ( BA ) switched its $35.50 per-share offer to an

all-stock deal valued at $37.25 per share, it meant Spirit would

have to carry out due diligence on Boeing ( BA ), ensuring both parties

were fully informed about each other's status, the sources said.

After initial hesitation, Spirit's board and Morgan Stanley

gave their final OK on Sunday, the sources said. Amid soaring

projected demand for planes, its shareholders - minus Onex which

exited in 2014 - would receive some $4 billion in stock to sell

core Spirit factories and some other assets back to Boeing ( BA ).