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 Winter 2016 Snapshot provides an in-depth look at current investor universe dynamics, the impact of recent build-rate uncertainty, and shifting MRO dynamics.
Driven by consolidation pressures, growth in passenger traffic, strong operating profits for airline operators and healthy order backlogs on key platforms, the aerospace and defense industry has continued to enjoy strong M&A activity in 2016. Year-to-date through Q3, 253 transactions had been completed across the industry, representing a 17% increase over the same period in 2015. Activity has been particularly robust in the MRO, IT services, and components and subsystem sub-segments.
However, with ongoing concerns related to build-rate uncertainty on several key platforms, cost pressures from OEMs and increasing capital demands, many shareholders of tier I and tier II suppliers are facing critical strategic decisions related to growth, ownership transition and outside investment.
Key Industry Trends
Strong Backlog, Slowing Momentum
Order and production backlogs for both Boeing and Airbus remain historically strong due to attractive long-term forecast for air traffic growth. Through September of 2016, Boeing’s backlog totaled 5,477 aircraft, of which 5,185 (or 85%) are for 737 or 787 aircraft. As of October 2016, Airbus’ backlog stood at 6,710 aircraft, with 6,259 (or 93%) attributable to the A320 and A350 platforms. The number of Airbus aircraft to be built and delivered represents a 10-year production backlog. In comparison, Boeing’s backlog would last just under 8 years at the current production levels.
Net Orders vs. Deliveries: 2013 – 2016 YTD
Net order trends on the 747, 777, and A380 have led the industry’s two largest OEMs to implement or announce build rate declines. Additionally, several analysts have expressed concerns about Boeing and Airbus reaching their announced build rate volumes on the popular 737 and A320 platforms.
Shifting build rate and backlog dynamics will likely have a meaningful impact on aerospace M&A trends over the next 12-24 months as investors come to terms with less mid-term visibility and increasing concentration on key platforms.
OEM Deliveries, Backlog, and Build Rates as of Q3 2016
Narrowing Investment Criteria From Strategics for Build-To-Print Assets
Given the strength of the industry’s long-term outlook as well as the significant availability of capital in the market, investor interest in aerospace continues to be robust. However, following 8+ years of active consolidation in the industry, many of the historically acquisitive strategic investors have begun to focus and narrow their respective investment criteria. As recently as 2-3 years ago, Industry investors such as PCC, Kaman, Senior, GKN and Transdigm pursued acquisition opportunities with build-to-print (BTP) manufacturers in an effort add manufacturing capabilities and capacity as well as fill-out LTA and customer portfolios. Today, with the desired platform, infrastructure and capabilities in-house to organically pursue new BTP programs, the acquisition focus for many U.S. strategics has narrowed to targets with proprietary content of design-and-build capabilities.
With many of the larger industry strategics focusing their investment criteria, valuation metrics for many segments of the BTP market have plateaued or seen a slight decline over the past 18 months. Based on the analysis of 73 selected component manufacturing transactions completed between 2013 – 2016, BTP transactions averaged an EBITDA multiple of 8.4x versus an average multiple of 12.7x for targets with proprietary content. Furthermore, during the same period, a much greater percentage of BTP transactions were completed with private equity investors (58%), compared to strategic buyers (42%). This demonstrates the shift in investor universe dynamics within the two groups.
Design-to-Build vs. Build-to-Print Valuation Metrics – 2013 to 2016 Component Manufacturing Transactions
Still, strong valuation multiples remain achievable for shareholders of BTP component manufacturing operations. Today, these valuations are coming from international strategics seeking access to North American customer relationships or acquisitive portfolio companies of private equity firms looking to enhance manufacturing capabilities or LTA mix. Meridian estimates there are 100+ PE-backed portfolio companies currently operating in North America and Europe, leading to a significant universe of “hybrid” investors (i.e. strategic investors with the financial backing of private equity capital). With respect to international M&A activity, over 340 cross-border transactions have been completed across the aerospace industry since 2010, with a majority of inbound investment coming from markets such as Canada, Europe, China and India.
For shareholders considering a potential ownership transition or outside investment, it is important to understand the optimal investor universe and related value drivers for your business. Gaining access to and correctly positioning the value-proposition for the relevant investor universe is key to achieving a premium valuation.
Shifting Trends in MRO Segment
Attractive air traffic growth and low oil prices have led carriers to slow the retirement of mature aircraft. By 2025, Boeing projects that the number of planes reaching 25 years of age will reach over 500 annually, driving significant demand for MRO services and components. Over the same period, total fleet figures for both passenger and cargo aircraft are forecasted to grow annually at 3.8% and 2.3%, respectively. Analysts forecast this will lead the total estimated MRO market to grow at 3.3% annually and reach $100.4B by 2025.
Still, given the introduction of new aircraft platform variations over the past several years, MRO providers are also working to identify strategies to address fleet modernization trends. Researchers suggest that 43% of all new aircraft deliveries will replace old technology aircraft between now and 2025. As a result, successful MRO providers will need to shift their solutions. In particular, the engine component segment is forecasted to meaningfully increase in market share while new technology innovations will reduce the share within airframe maintenance.
As older aircrafts are replaced with new models and technology, maintenance cycles will likely become more predictable and less frequent. It is estimated that the amount of unplanned and unscheduled maintenance could be reduced by as much as 20 – 40% over the next 10 years.
This trends challenges MROs to provide a more integrated, one-stop approach to services, technology and engineering in order to proactively address service needs. Many MRO providers are pursuing acquisition strategies to add these capabilities. In 2016, consolidation has remained active within the MRO & Logistics segment as investors look to add customers, bundle service / product offerings and expand engineering and intellectual property assets. In Q3 alone, there were 18 transactions in the segment, making it the most active subset with aerospace & defenses M&A for the quarter.
Examples of this activity include Aviation Technical Services (ATS) acquisition of Texas Pneumatic Systems (TPS) in August as well as Dubai Aerospace Enterprise (DAE) acquisition of Jordan Aircraft Maintenance Limited (Joramco) in September 2016. ATS’s acquisition of TPS, a provider of repair and overhaul services for pneumatic and fuel related components and systems, expands the company’s offering in new technology components. Meanwhile, DAE’s investment in Joramco was motivated by the desire for DAE to augment its service offering with the addition of a high quality service provider for regional and global airlines.
Recent Aerospace Industry News
– Aerospace and Defence Industry M&A Flying High – read more
– As Airlines Slow Orders, Boeing’s Output at Risk – read more
– Can Airbus Surpass Boeing Co.’s Aircraft Production? – read more
– Boeing Takes on Peers, Partners In Bid for Replacement Parts Business – read more
– Growth of Air Passenger Traffic to Impact the Global Full-Service Carrier Market – read more
Select Recent Transactions
Select Case Studies
Aerospace and Defense Public and Transaction Valuations
EV/EBITDA Transaction Multiples by Category (3 Year Average)
EV/EBITDA Transaction Multiples by Deal Size (3 Year Average)
Meridian Capital and Global M&A Aerospace Practice Overview
Selected Meridian and Global M&A Partners Aerospace and Niche Manufacturing Transactions
Aerospace Subsectors Covered
Global M&A Partners Aerospace Coverage Practice Overview
Meridian Capital is a founding member of Global M&A Partners, a leading international partnership of 34 independent investment banking firms transacting in over 50 countries. The partnership has completed over 1,500 transactions with combined value in excess of $44 billion.
Meridian Capital serves on the Aerospace Practice Group leadership team for GM&A Partners, providing our clients with unparalleled access to global investors and knowledge of international M&A markets and trends.
– Unparalleled access to global aerospace investors
– Resources located in North America, Europe and Asia
– Deep operations, finance and transaction experience
– Led by former Chairman and CEO of Airbus. Noel Forgeard
– Bi-annual internal coverage team meetings to discuss current industry trends
– Leading research and thought leadership
– Annual attendance at key industry conferences and tradeshows
Aerospace Practice Group Leadership Team