Aerospace Transactions Dominate A&D Deal Space

The U.S. sequestration and related defense budget uncertainty continued to impact merger and acquisition (M&A) volume in the aerospace and defense (A&D) sector during the first quarter of 2013, and could slow activity for the rest of the calendar year, according to PwC US.

In the first quarter of 2013, there were 10 deals worth more than $50 million, with a total value of $1.4 billion. Deal volume was higher and deal value was consistent with the first quarter of 2012, which recorded three deals worth $50 million or more, with a total value of $1.3 billion. Deal value during the first quarter represents an annual rate of less than $6 billion compared to the 10-year average of around $20 billion. Overall, first quarter deal volume and value was down significantly compared to the fourth quarter of 2012, which recorded 14 deals worth more than $50 million valued at $8.8 billion.

“It has now been 20 months since the last defense deal announcement greater than $1 billion. While the commercial aerospace M&A market has been active, the defense M&A market has essentially been frozen since sequestration first became a possibility with passage of the Budget Control Act of 2011 in early August 2011,” says Scott Thompson, PwC’s U.S. aerospace & defense leader. “Companies generally have strong balance sheets and large cash positions and are poised to deploy capital. However, until the Department of Defense provides specific guidelines regarding the defense budget, it appears as though maybe these A&D companies are not quite ready for deal making.”

Consistent with past quarters, strategic investors led A&D deal activity with 80 percent being involved during the first quarter and the remainder being financial investors. Strategic acquirers were advantaged from strong recent stock market performance, making equity a more attractive form of currency for financing new deals.

“Although we have not seen it in announced deals, we are noticing that interest is on the rise among financial investors. They also have healthy balance sheets and are facing less corporate competitive pressure, but are still pursuing deals in a cautious way,” Thompson continues.

On a regional basis, the U.S. led deal activity on the acquisition front with seven deals worth $50 million or more. There were four deals targeting Asia & Oceania (one target in China) entities and four targeting those in the U.S.

“Companies are awaiting more clarity regarding the direction of the U.S. defense sector and that clarity may potentially drive more deals. The emerging markets will likely continue to be global players in M&A – particularly China – given the growth of their markets and as they start to build their own aerospace industries," according to Thompson.

Although aerospace continues to dominate the market, recording eight deals worth $50 million or more, the strongest pace since 2000, the total value of $900 million was the slowest pace since 2009. Aerospace valuations lead the market, and defense companies may diversify more into the sector, which could increase M&A totals.

“We continue to see defense companies having a greater interest in diversification, adjacent markets, and new commercial applications for their products. That level of interest is increasing, but we have not yet seen it fuel more deal activity,” Thompson says. “Uncertainty as to the extent and nature of the spending downturn continues to affect deal making. The A&D M&A outlook may remain weak for the remainder of the year, but we could see more activity beyond the end of this calendar year.”