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Lazard sees ripe opportunities in aerospace and defence M & A, buoyed by diversification trendsMichael Richter, Managing Director and Global Head of Aerospace and Defense Investment Banking Group at Lazard Frères observes a significant time in aerospace and defence mergers and acquistions, ahead of Farnborough Air Show 2022 next week. |
A wealth of opportunities, underpinned by industry diversification into new sectors, new technology programs in AAM and drones, new space themes and a global increase in defence spending, makes for a significant time in aerospace and defence mergers and acquistions.
The world’s second largest air show (eclipsed only by Paris which returns in June 2023) returning as a physical event will bring international industry players face to face again. There will be the realisation of pent-up demand in M & A, he suggests, as companies investigate adding value to their businesses through diversification, through acquisition or mergers.
So far this year (May 2022), 148 merger and acquisition transactions have been announced, versus 166 during the corresponding period in 2021. This follows a relatively strong year for M & A in 2021 with US$125bn of deals logged, compared with US$39.8bn of deals concluding in 2020 - in the midst of the global pandemic. In 2019, activity volume totalled $119.2bn.
Noteworthy deals completed in 2021 (in the US$5bn-plus transaction category, where Lazard is especially active) included Parker-Hannifin’s acquisition of Meggitt for $10.2bn; Viasat’s purchase of Inmarsat for $7.3bn and Blackstone, Cascade and Global Infrastructure Partners acquiring Signature Aviation for $5.6bn.
Lazard has identified a number of trends in key industry sectors that are poised to influence M & A activity based on activity these past 18 months:
Commercial Aerospace
OEMs and Tier 1 companies continue to consolidate their customer bases (putting more eggs in fewer baskets) as sub-tier suppliers face near-term challenges on skilled workforce, raw material price inflation and industry standard price downs over the life of a contract.
Growing interest in business aviation and fixed base operations (FBO businesses) as on-demand aviation continues to trend. Exposure to business jets is viewed favourably by investors – a diversification play away from commercial airlines as utilization levels have eclipsed prior peaks, largely driven by new users coming into the market.
Aircraft manufacturers continue to diversify their expertise with investment activity in new-generation, alternative powered, technology platform programs, alongside newly arrived innovative entrepreneur backed ventures.
The stabilizing of airline fleets and OEMs committed to increased build rates, especially growing interest in narrowbody (A320/B737) series aircraft.
Significant global air cargo demand and constrained capacity is driving a growth in funding for freighter conversions and production as freighter utilization soars.
Supply chain health continues to hinder production as specialist providers, e.g. castings and forging companies, look to ramp up and seek opportunities presented by the rebound.
Business Aviation
Airline disruption, continuing health concerns, new business aviation models and the development of air services infrastructure continue to drive a significant increase in business jet demand.
Real time demand for business jets remains strong amongst major OEMs showing strong sequential backlog growth in Q1 2022. In the largest single market, the USA, utilization grew 22% YOY in April 2022 with increases of 26%, 14% and 23% for charter, fractional and general aviation, respectively (Argus International, May 2022.)
Aftermarket / MRO and Aviation Services
Prospective buyers continue to value businesses with aftermarket exposure, which is bolstering M & A opportunities in this sector. Examples include Unical Aviation’s sale to Platinum Equity and Carlyle’s acquisition of Signature Aviation’s Engine Repair and Overhaul Business for $230m. (Lazard advised the seller on both transactions).
Aftermarket and MRO M & A is expected to continue to be robust as aircraft utilization increases and shifting demand and supply dynamics drive investor confidence.
MROs that support narrowbodies will fare well as near term MRO capacity increases have shifted toward this type. The aftermarket remains a source of sustainable cash flows, relatively insulated for cycle timing with operating results more dependent on stable fleet sizes versus changing delivery schedules.
Established MRO markets in North America and Western Europe are expected to marginally expand over the next few years. Asia Pacific, including China, will be boosted by domestic travel growth.
Space
Major new space themes, including the proliferation of small satellite constellations, is generating public and private investment in launch systems, satellites, electronics and analytics.
Existing A&D suppliers have been actively securing a foothold in the space sector including Raytheon’s acquisitions of Blue Canyon and SEAKR Engineering, together with BAE Systems’ purchase of InSpace Systems.
Aerospace and defence suppliers that leverage their manufacturing expertise can further diversify revenue into the space supply chain through new OEM relationships (including SpaceX and Blue Origin) as well a universe of Tier 1 and Tier 2 suppliers.
Defence
Defence primes are actively making investments in various technology programs and companies to gain access to new developments and fill product and capability gaps. Interest lies in defence electronics, C4ISR capabilities as government spend on detection, identification, tracking and IT/cybersecurity reaches record levels.
Smaller scale M & A is expected to continue with transaction volume set to outpace commercial activity in the next 24 months.
Larger scale M & A transactions may be more challenged in the current regulatory environment.
US Defense budget demonstrates signs of a ‘Super Cycle’ with President Biden’s spending exceeding Trump Administration’s forecasts, as national priorities and renewed focus on warfare and technology are unlikely to lead to decreased funding levels.
Russia’s invasion of Ukraine has highlighted the significance and necessity for the Department of Defense’s confirmed strategic shift away from anti-terrorism and counter insurgency to near peer conflicts. Defence readiness sees an increased use of UAV’s and quad drones for surveillance.
Lazard’s Aerospace and Defence Practice
Lazard has a long, revered history in the aerospace and defence sector, advising many high-profile transactions in the industry over the past decade. Announced in April 2022, the sale of Telephonics Corporation represents Lazard’s 104th Aerospace and Defence transaction (totalling over $125bn in deal value since 2013).
Recent transactions include the sale of Triumph’s Stuart, Florida Aerostructures business to Daher; Safran’s purchase of Orolia; Thales’ Ground Transportation Systems business to Hitachi and the sale pf Embraer’s Evora, Portugal operations to Aernnova.
www.lazard.com
BlueSky Business Aviation News | 14th July 2022 | Issue #662
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