MERIDIAN CAPITAL OVERVIEW
Twice a year, Meridian Capital publishes its Aerospace and Defense M&A Update, which focuses on key trends in the aerospace and defense M&A market. The Winter edition focuses on activity within the aerospace aftermarket, the impact of trade tensions, and consolidation among tier I suppliers and defense contractors.
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OUR AEROSPACE & DEFENSE TEAM
OUR AEROSPACE & DEFENSE EXPERTISE
MRO Components and Services
Automation and Tooling
Precision Machining & Assembly
OPPORTUNITIES & CHALLENGES
INDUSTRY M&A TRENDS
Overall, 2018 proved to be another strong year in aerospace and defense M&A activity. Total deal value reached $30.3 billion through Q3 of 2018, representing a 48 percent increase over the 10-year average for the same period. With 290 total transactions, deal volume also remained higher than the 10-year average.1
CONTINUED FOCUS AND ACTIVITY WITHIN THE AEROSPACE AFTERMARKET
- The Maintenance, Repair, and Overhaul (“MRO”) market is projected to achieve consistent growth over the next 10 years, growing at a CAGR of 4.0%.2 Both Boeing and Airbus have announced strategic plans to make MRO products and services a key growth focus. Boeing has specifically set a $50 billion goal for aftermarket service revenue by 2028; a number that would triple its current revenue from the aftermarket.
- Strategic focus and investments by Boeing and Airbus are expected to drive significant consolidation and valuation premiums within the MRO segment over the next three to five-plus years.
- Private equity investors have taken notice of the attractiveness and growth within the MRO sector and are actively looking to gain exposure. In July, Vance Street Capital made a platform investment in Seattle-based Jet Parts Engineering, a manufacturer of PMA parts for the aftermarket. Veritas Capital is planning a sale of StandardAero Aviation, the worlds largest MRO provider, to The Carlyle Group that could fetch over $5 billion.3 Veritas is a prime example of a private equity investor that could secure a large return on an MRO investment. TAT Group also announced that it will divest a majority stake of MRO specialist, Sabena Technics, to a consortium of private equity firms. The acquisition is expected to be finalized in the second quarter of 2019, subject to regulatory approvals.
- As Boeing prepares for the 2025 launch of its new 797 family aircraft, it is positioning to change its business model with the new aircraft to provide more aftermarket services. The newest mid-range jet is expected to achieve the majority of its revenue from life-cycle management services.4
INTERNATIONAL AEROSPACE AND DEFENSE CONNECTIONS
Sector Team Lead
North American Sector Team Lead
Managing Partner, Aerospace & Defense
“The European supply chain has kept and will keep consolidating. European companies in all sectors (machining, composites, electronics, …) are also actively looking at developing their presence in the USA, in the same time to follow Airbus and other OEMs in their expansion in America (new Airbus construction line in Mobile, joining forces with Bombardier, …) and to diversify their client base in gaining contracts on Boeing platforms. This will undoubtedly drive Aerospace M&A transactions. On the other side however, we have so far seen less interest from US firms to invest in Europe, where attractive targets are available.”
Philippe Doré, Global M&A Partners
GROWING TRADE TENSIONS IMPACT ON THE AEROSPACE M&A MARKET
- With increasing tariffs on key materials, the already stressed aerospace supply chain is expected to feel increased pressures from rising cost inputs. Mylene Scholnick, the Senior Advisor at international consulting firm ICF, believes that aircraft manufacturers have not yet felt the impact of tariffs stating, “the aerospace industry consumed about $13 billion of raw materials in 2017; 9% being steel, 22% aluminum, and 30% titanium. The industry has not felt yet the change in policy but may in the upcoming months.”
- Tariffs on production inputs are expected to impact the supply chain at all levels starting with Boeing. To offset this pressure, CFRA analyst Jim Corridore predicts that Boeing will push for lower costs from its key suppliers, encouraging consolidation down the supply chain to help combat cost increases.
- Ongoing trade disputes between the U.S. and China have already directly impacted cross-border transactions which require Chinese regulatory approval. United Technologies’ $30 billion acquisition of Rockwell Collins took longer than expected due to issues receiving Chinese approval. Additionally in the United States, the CFIUS approval process has presented a hurdle for Chinese direct investment in U.S. aerospace among other industries.
CONSOLIDATION CONTINUES AMONGST MAJOR TIER 1 SUPPLIERS
- Aerospace M&A activity in 2018 has been highlighted by a number of megadeals, with multiple transactions in excess of $1 billion. Most recently, in October TransDigm Group announced intentions to acquire Bellevue-based Esterline Technologies for $4 billion. The acquisition expands TransDigm’s platform and fits well with its strategy of reducing supply chain pressures by acquiring companies that are sole suppliers of proprietary parts.
- Large acquisitions by tier I suppliers in 2018 are a continued trend from the prior year. In early 2017, Safran Group announced plans to acquire Zodiac Aerospace for $8.2 billion which completed in late 2018. Also announced in 2017 was United Technologies’ plan to acquire Rockwell Collins for $30 billion. The deal closed in late November, 2018 and gave United Technologies enough scale to split off its aerospace business as a standalone company.
- Looking forward, these large transactions are expected to drive consolidation further down the supply chain as suppliers aim to differentiate themselves in a highly competitive environment.
BOEING HOLDS PRIVATE CONFERENCE WITH SUPPLIERS
- In October, Boeing hosted a supplier conference to discuss potential new contract terms for companies that want to bid on jet interior deals. The meeting’s intention was to streamline the bidding process to increase supply chain efficiencies for all future programs as well as encourage suppliers to accept new terms and conditions with price concessions.
- As Boeing continues to pressure suppliers for lower prices and increased build rates, proactive suppliers are making significant investments to train and expand their workforce and upgrade equipment to further optimize their cost structure. This pattern is driving numerous sub-$100 million revenue suppliers to pursue strategic acquisitions, partnerships, or outside investments to provide incremental capital, manufacturing capabilities, and capacity necessary to meet Boeing’s demand.
- Notable examples of suppliers making strategic acquisitions in response to supply chain pressures include Consolidated Precision Products’ acquisition of Oregon-based Selmet and Cadence Aerospace’s acquisition of Perfekta.
DEFENSE MARKET STRENGTH DRIVES PRIVATE EQUITY INTEREST
- In early 2018, the Trump administration released its second full defense budget request. The proposed budget for FY19 is $686 billion, representing a 12% YoY increase.
- The positive spending outlook for the defense industry combined with its historically low levels of cyclicality make it an attractive segment for private equity and strategic investors.
- With a decreasing in-theater presence, defense spending is being focused on cybersecurity, IT services, and C4ISR.
- The cybersecurity and engineered services and products subsectors attracted strong private equity interest in 2018. Notable deals included Arlington Capital Partners’ acquisition of Dependable Global Solutions as well as Veritas Capital’s portfolio company, Alion Science & Technology, announcing intentions to acquire MacAulay-Brown. The engineered services and products subsector saw investments from AE Industrial Partners with its purchase of Gryphon Technologies as well as Argosy Private Equity with its acquisition of Capewell Aerial Systems.
- Private equity firms have been expanding their defense industry coverage to better position themselves within the sector. In 2018, private equity firms Gemspring Capital and Liberty Hall Capital Partners both appointed four-star generals as advisors to further strengthen their defense expertise.
CONSOLIDATION AMONG LARGE DEFENSE CONTRACTORS FOCUSED ON TECHNOLOGY
- As a key part of its strategy to improve defense capabilities, the U.S. military has put considerable emphasis on investment in defense technology. The latest defense budget indicated a 24% increase in Research, Development, Test, and Evaluation (“RDT&E”) spend between FY17 and FY19.
- With the Department of Defense outlining its highest priorities relating to technological advancements, major defense contractors are looking to enhance technological capabilities through acquisition, driving consolidation within the industry. In October the merger between Harris and L3 Technologies was announced, creating the seventh largest defense contractor in the world. As two of the industry’s largest R&D spenders, the new entity is expected to emphasize the development of high-tech products. Other notable defense technology acquisitions include Northrop Grumman’s $7.8 billion acquisition of Orbital ATK in September along with General Dynamics’ $9.7 billion acquisition of CSRA.
SELECT TRANSACTION CASE STUDIES
Transaction Multiple by Segment
(Transactions completed since 2010)
- EBITDA Multiples (source: Pitchbook)
Transaction Volume by Estimated Value
(Transactions completed since 2010)
- EV (source: Pitchbook)