United to sell energy unit

AAI owner's deal for Detroit Stoker allows defense focus

November 23, 2006|By Allison Connolly | Allison Connolly,Sun reporter

AAI owner United Industrial Corp. has signed a $22.4 million deal to sell its energy business, allowing it to focus on defense.

The Hunt Valley company announced yesterday that Detroit Stoker Co., which makes combustion equipment for steam producers, will become part of two newly created entities, Bram Acquisition Corp. and DSC Services Inc., which are affiliated with a private investment group. United Industrial will receive $17.4 million in cash and $5 million in promissory notes. The deal is expected to close by March 31.

Detroit Stoker, based in Monroe, Mich., will merge with Bram and become a wholly owned subsidiary of DSC, according to a United Industrial filing with the Securities and Exchange Commission. A call to Mark E. Schwarz, who is listed in the filing as chief executive of both DSC and Bram and is the sole general partner at Dallas-based investment firm Newcastle Partners LP, was not returned yesterday.

United Industrial has been trying to sell the energy business for years, and was weighed down by thousands of claims related to asbestos-filled parts made by third parties and used in Detroit Stoker's products before 1981.

But after a spike this year in energy prices, the Michigan subsidiary saw a surge in demand for its stokers and profits soared. Frederick M. Strader, United Industrial's president and chief executive officer, said during an August conference call to discuss second-quarter results that he was optimistic a buyer would be found.

The company's main business, Hunt Valley-based AAI Corp., makes unmanned aircraft for the military. Its Shadow Tactical Unmanned Aircraft System has been deployed by the Army since 1999 and is being used to collect battlefield intelligence in Iraq.

In June, the company purchased an Australian firm, Aerosonde, which makes small unmanned aircraft used by the National Oceanic and Atmospheric Administration to take close-up photos of tropical storms.

AAI employs more than 2,000 people, mostly in Hunt Valley.

Analyst Michael Lewis said the price for Detroit Stoker was in line with his estimates of $19 million to $22 million.

"Now, the company can focus 100 percent of its energy on the defense business," said Lewis, of BB&T Capital Markets, which either does or expects to do business with the companies it covers. "You no longer have a non-core business taking up management's time."

In his report, analyst Michael French of Kaufman Bros. Equity Research in New York said the subsidiary could have fetched as much as $30 million, but he expected Wall Street to respond favorably to the sale because it rids United Industrial of the asbestos claims.

"The removal of the `asbestos overhang' is a positive development, in our view," said French, who does not receive compensation based on his report but whose firm may do business with the companies it covers.

United Industrial stock closed up 98 cents at $48.32 a share yesterday.

allison.connolly@baltsun.com

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