Twice a year, Meridian Capital publishes its Aerospace M&A Snapshot, which focuses on key trends in the aerospace M&A market. In addition to covering general aerospace industry trends, the Summer 2015 Snapshot provides an in-depth look at private equity investment activity, automation trends, and recent drivers of engine component supplier transactions.
The aerospace industry has continued to experience robust M&A activity over the last six months, with over 40 transactions completed since October 2014. Strong commercial aircraft backlogs, growing aircraft demand from emerging markets, and build rate increases on next generation platforms reflect an industry that remains poised for growth. Both strategics and private equity firms have been acquisitive in an effort to enhance manufacturing capabilities, increase value-added product offerings, and improve their positioning for the introduction of re-engined variants of the A320 and 737. Additionally, the pressure to increase production volumes has also driven significant investment and acquisition interest in automation throughout the aerospace supply chain. Given strong valuations and continued consolidation activity, shareholders should benefit from reviewing growth, financing, and/or ownership transition strategies and goals.
Key Industry Trends
Robust Commercial Backlog and Build Rate Increases
As of April 2015, Boeing and Airbus had an aggregate backlog in excess of 12,066 aircraft, representing over eight years of production. At a combined 6,518 aircraft, the 737 MAX and A320neo currently represent the largest percentage of the OEM backlog at 54% of total unfilled orders. Recent orders for the leading single aisle aircraft platforms include, Copa Airlines’s $6.6 billion order for 61 737 MAX and Avianca’s order for 100 A320neo. The latter representing the largest aircraft order in Latin American history. Demand for next generation widebody aircraft also remains strong, reflected by the combined 787 and A350 backlog of 1,613 aircraft.
The large order backlogs for these more fuel efficient aircraft have pushed OEMs to increase production rates to historic highs. In 2014, Boeing announced it would raise production by 24% and 40% on the 737 and 787, respectively, over the next three years. Airbus also announced an increase in A320 production to 50 aircraft per month by Q1 2017, up from 42. Airbus’ new assembly facility in Alabama, set to begin incremental production this summer, will assist the OEM in achieving its A320 build rate increase. Airbus is also planning to quickly ramp up production on the A350 to 10 aircraft per month over the next 3 years.
Private Equity Firms Continue to Drive M&A Activity
Positive industry trends and contracted revenue dynamics have continued to drive private equity investment in the aerospace industry. Meridian estimates that 230 private equity investments have been made in the aerospace & defense industry in the U.S. since the beginning of 2010, including 27 over the past six months.
Private equity acquisitions have been made throughout the supply chain in subsectors in which engineering and capital requirements create barriers to entry and market fragmentation offers add-on opportunities to quickly increase scale and capabilities. In-house design and product development continue to be in greater demand than traditional build-to-print services. Suppliers manufacturing complex assemblies and mission critical parts, such as landing gears and engine components, are attracting significant interest.
Two recent private equity transactions were focused on high tolerance components. Industrial Growth Partners made a platform acquisition of FMH Aerospace Corp., a manufacturer of products that facilitate the transfer of fluids and gases in hot sections of turbine engines. In December 2014, PCX Aerostructures acquired Cam-Tech, a manufacturer of high precision, flight critical parts and assemblies for commercial and military aerospace. PCX Aerostructures was acquired by RFE Investment Partners and 24/6 Capital Partners in April 2014 as a platform to pursue strategic add-on acquisitions in the military and commercial aerospace market.
In addition to making direct investments in aerospace suppliers, private equity firms have also been seeking to capitalize on the attractive M&A environment to sell existing aerospace portfolio companies. According to Pitchbook, there are over 60 aerospace and defense private equity portfolio companies which have been held for over four years. This dynamic will drive continued private equity divestment activity in the industry for the next 2-3 years.
Raw Material Suppliers Seek to Expand Value-added Titanium Product Offering
Commercial aerospace growth coupled with increased pricing pressures from Asia, have driven many U.S. raw material suppliers to increase their aerospace exposure and pursue vertical integration opportunities. Over the last year, leading specialty metal suppliers, including Alcoa and Allegheny Technologies Incorporated (ATI), have made a strategic shift toward manufacturing finished aerospace components through acquisition. In particular, Alcoa and ATI have focused on expanding midstream and downstream titanium supply chain capabilities to become better positioned on next-generation aircraft.
In March, Alcoa acquired RTI International Metals and TITAL to gain additive manufacturing and precision machining capabilities. The RTI International Metals acquisition increased Alcoa’s aerospace revenue by 13% and grew aerospace products to 37% of Alcoa’s value-added revenue. Similarly, in June 2014, ATI acquired Oregon-based Hanard Machine, Inc., a precision manufacturer of hard metal aerospace components, to become fully integrated and produce products from titanium investment castings to precision machined finished parts.
Increased Levels of Automation Throughout the Supply Chain
In recent years, OEMs have used increased levels of automation to drive greater throughput and reduce operating costs. With increasing build rates on several of its platforms, Boeing is forecasted to invest $1 billion in automation over the next few years. In addition to being more efficient than traditional manufacturing methods, robotics are forecasted to significantly reduce employee injuries and manufacturing defects. According to Reuters, a robotic drilling and riveting system installed at Boeing’s 737 production facility is projected to reduce employee injuries and defects by 50% and 66%, respectively. OEM adoption of robotics is also projected to drive automation investments throughout the supply chain. Large Tier 1 suppliers such as Spirit have implemented automated drilling and composite inspecting and laying robots to lower lead times and increase productivity.
Greater demand for robotics is creating increased bidding opportunities for suppliers. Two automation disciplines that continue to be in high demand include design and tooling support services that help integrate existing systems with new automation technologies and engineering and software programming services that ensure systems meet the high accuracy requirements of aircraft OEMs.
As OEMs seek to simplify employee training procedures, reduce injuries, and streamline manufacturing processes, robotics manufacturers with flexible or proprietary solutions are generating strong investor interest. In November 2014, the Onex Corporation made an investment in Advanced Integration Technology, Inc., a designer and manufacturer of automated tooling and equipment for the assembly of aerospace structures. Washington-based Mobile Tool Management, a provider of portable aerospace automation tools and software systems, also raised growth capital recently to support production increases and ongoing R&D.
Next Generation Engine Platforms Attract Investors
Recent advancements in turbofan engine technologies have driven many OEMs to opt for new engines instead of fully redesigned airframes on next generation aircraft. The A320neo, entering full production later this year, will be one of the first aircrafts to utilize this next generation of engine platforms. Airbus customers will have the option to choose from two engine variants on the A320neo, Pratt & Whitney’s PW1000G and CFM’s LEAP-X. Using the latest combustion technologies, both engine variants are projected to achieve a 15% improvement in fuel burn compared with current models. The LEAP-X will also be used in Boeing’s 737 MAX, which is expected to begin deliveries in mid-2017.
With Pratt & Whitney’s annual engine production set to double and CFM’s to increase 16% over the next five years, both financial investors and engine component manufacturers are seeking to gain a stronger presence on next generation engine platforms. A recent case study includes Standex International Corporation’s acquisition of Enginetics, an Ohio-based manufacturer of aircraft engine components.
Moreover, with OEMs leveraging new additive manufacturing methods, heat resistant coatings, and ceramic composites, the number of components required to build next generation engines has been dramatically reduced. The efforts to reduce weight through these advancements has resulted in fewer and more competitive bidding opportunities for suppliers, motivating many to pursue acquisitions to broaden capabilities and services. As a result, companies with LTAs on next generation platforms are commanding premium valuations.
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