Mission control Fourth-quarter 2015 aerospace and defense industry mergers and acquisitions analysis

Transcription

1 Mission control Fourth-quarter 2015 aerospace and defense industry mergers and acquisitions analysis Highlights Executive summary Deal activity Deal market characteristics Large deals Methodology Resources

2 To our Mission control readers Chuck Marx US Aerospace & Defense Leader Welcome to Mission control, PwC s analysis of deal activity in the aerospace and defense (A&D) sector. In our fourth quarter edition, we provide an overview of deal activity for the full year, as well as expectations for deal activity in Two thousand and fifteen was a record year in M&A for the A&D sector with a total deal value of $61.7 billion, nearly three times the value in 2014 and more than 50 percent higher than the previous record year in Deal volume declined 20 percent in 2015, to 43 deals, over the same period. Average deal size more than tripled to $1.4 billion in 2015, compared to However, 2015 experienced increased activity in undisclosed deals and deals valued under $50 million, specifically in China which increased to 46 deals, compared to 28 deals in The fourth quarter declined in deal value by 50 percent, to $2.1 billion, compared to Q and deal volume declined by greater than 40 percent, to nine deals, over the same period. Megadeal volume remained flat, on a year-over-year basis, however, the average megadeal value increased from $2.3 billion in 2014 to $8.5 billion in The megadeal average was driven primarily by the largest deal announced in Berkshire Hathaway s acquisition of Precision Castparts (PCP) for a value of $37.2 billion, the largest deal in sector history (however, to remain constant with PwC analysts methodology the deal value used for analysis is the transaction value less existing net debt, which is valued at $31.6 billion). This deal speaks to the positive outlook of the commercial aerospace market and PCP s current position on key commercial growth platforms, high margins, and stable free cash flows. The largest defense deal in 2015 was Lockheed Martin s acquisition of Sikorsky Aircraft, valued at $9 billion. The deal was driven by United Technologies portfolio review and the decision to reposition the company to focus solely on providing high-technology systems and services, resulting in the divestiture of their OEM (original equipment manufacture) defense and commercial helicopter business. This deal is among the top six of all time (1. Berkshire Hathaway/Precision Castparts, 2. UTC/Goodrich, 3. British Aerospace/Marconi Electronic Systems, 4. Boeing/McDonnell Douglas, 5. Raytheon/Hughes Aircraft, 6. Lockheed Martin/Sikorsky). The deal clearly outlines Lockheed Martin s rationalized focus, as predominantly a mission-focused air and space platform provider, while allowing the deployment of large cash reserves. Lockheed Martin has already announced, in January 2016, to divest its IS&GS (Information Systems & Global Solutions) business in a transaction with Leidos through a Reverse Morris Trust technique, which provides Lockheed with $1.8 billion and Lockheed shareholders will receive roughly 50.5 percent of the combined company. 2

3 This deal defines Lockheed s strategy to reshape their portfolio makeup for the future and could spur further megadeals in Commercial aerospace companies reducing their exposure to declining defense budgets and Tier 1 and Tier 2 defense supplier consolidation, seeking cost efficiencies, should be a continued theme in Increased cyber attacks, threats of terrorism, and greater geopolitical instability continue to drive activity towards targets with capabilities in electronic warfare, C4ISR (Command, Control, Communication, Computers, Intelligence, Surveillance and Reconnaissance) and cybersecurity. These capabilities are more attractive for A&D investors that are looking to align and strengthen their defense technology portfolios. The acquisition of Exelis Inc. by Harris Corp. valued at $4.5 billion was an expected consolidation of Tier 1 suppliers within the defense electronics segment. This deal now expands Harris s defense portfolio to include electronic warfare capabilities, along with positioning them as a leader in air traffic management. Raytheon s acquisition of Websense (recently rebranded as Forcepoint, and valued at $1.9 billion) further demonstrates consolidation among key cybersecurity players. Raytheon plans to combine their current cyber business with acquired Websense to expand and strengthen their portfolios and capabilities to better protect companies from cyber-attacks and data theft. PwC s Aerospace & Defense practice is monitoring several additional trends expected to affect the characteristics of deals in the sector: US defense portfolio alignment. Defense contractors continue to look for opportunities for growth and cost reductions, however, the United States and European governments continue to discourage further prime contractor consolidation. This means further defenses acquisitions are going to take place among the Tier 1 and Tier 2 supply base in a continued effort to exit government services businesses and enter the high-tech intelligence products segment, focused in C4ISR, electronic warfare, cybersecurity, and RPAs (Remotely Piloted Aircraft) markets. Government services consolidation. We expect continued consolidation in the government services sector. Government services will consolidate by percent over the next three to five years, as companies replace the scale which was lost by reduced activity in Iraq and Afghanistan, as well as reductions in government spending, and increase scale to improve affordability and competitiveness. We expect the industry to consolidate, to a half dozen large companies of $5 - $10 billion in revenue. 3

4 Financial investor activity. Stable revenue generation and a noteworthy order backlog for commercial airplanes continues to attract private equity and financial buyers to the sector. M&A activity among financial investors is expected to continue as they target companies with disjointed portfolios or those heavily discounted due to defense budget uncertainty. Investors are also looking to enter the A&D market through acquisition of companies highly focused on commercial growth platforms, best represented by Berkshire Hathaway s acquisition of Precision Castparts. Supply chain consolidation. Commercial OEM s and large Tier 1 s are demanding more integrated systems and complete sub-systems from the fragmented supply base, as the industry embarks upon a historic aircraft delivery ramp. An example of this consolidation of Tier 1 suppliers is GKN s acquisition of Fokker Technologies. GKN can merge the two companies aero structures businesses together and offer more integrated systems through the addition of Fokker s electrical wiring interconnection systems. Aftermarket consolidation. The highly fragmented MRO (maintenance, repair and overhaul) segment continues to see niche deal activity as the segment further consolidates. Enhanced services capabilities, expanded geographic reach and margin expansion continues to drive strategic investors deal activity to gain market share and strengthen MRO businesses. The industry is still waiting for an effective and sustainable vision for digital aviation to present itself. This presents an opportunity for innovation and revenue growth in this $60 billion fragmented market. Two thousand and fifteen saw an increase in activity and we feel that 2016 s M&A outlook for the sector is expected to remain focused around the steep commercial aerospace production increases, and further portfolio alignment among defense contractors. As the United States and Europe continue to face budget uncertainty and greater threats of terrorism and geopolitical unrest, companies may continue to strengthen their commercial aerospace platform exposure and defense capabilities focused on electronic warfare, C4ISR and cybersecurity. We expect activity in the A&D sector to proceed at a healthy pace in both the commercial aerospace and defense segments of the sector. We hope this analysis will serve as a useful tool for monitoring trends. Launch the data explorer at for a deeper dive into the data, or contact us to further discuss our insights. 4

5 Deal value ($bil) Deal volume Deal activity Two thousand and fifteen was a record year in M&A for the A&D sector with a total deal value of $61.7 billion (for deals >$50M), nearly three times the value in 2014 and more than 50 percent higher than the previous record year in Deal volume and value ( ) all deals Total deal value ($bil) Number of deals 10-year historical deal value and volume table all deals Total Deal Value ($ bil) Number of Deals

6 Deal value ($B) Deal volume Deal activity Deal value increased by 160 percent in the A&D sector despite a 20 percent decline in volume in 2015, compared to Total deal value, by status ( ) disclosed deal value of $50M Q4 Pending, Unconditional, Intended Completed, Part comp 2 Total deal volume, by status ( ) disclosed deal value of $50M Q4 Pending, Unconditional, Intended Completed, Part comp Deal value increased by 160 percent from $23.8 billion in 2014 to $61.7 billion in 2015 of pending, unconditional, and intended deals accounted for 60 percent ($37.2 billion) while the value of completed/partially completed deals accounted for 40 percent ($24.6 billion) of the total deal value in In the fourth quarter, deal value declined by more than 50 percent on a year-over-year basis. Deal volume declined by 20 percent from 54 deals in 2014 to 43 deals in On an annualized basis, volume of pending, unconditional, and intended deals increased by 30 percent (from ten deals to 13 deals) while volume of completed/partially completed deals declined by 32 percent (from 44 deals to 30 deals) compared to In the fourth quarter, volume of deals declined by more than 40 percent on a year-over-year basis. 6

7 Deal market characteristics North America dominated the deal activity, accounting for 91 percent of global deal value and 63 percent of global deal volume in 2015 M&A global map for 2015 deals disclosed deal value of $50M+ UK & Eurozone Local 5 deals, $1.7B Inbound 7 deals, $2.4B Outbound 4 deals, $3.1B Europe ex-uk & Eurozone Local 1 deal, $0.1B Inbound 0 deals, $0 Outbound 0 deals, $0 North America Local 15 deals, $50.4B Inbound 4 deals, $3.1B Outbound 8 deals, $2.5B South America Local 0 deals, $0 Inbound 0 deals, $0 Outbound 0 deals, $0 Africa/Undisclosed Local 0 deals, $0 Inbound 0 deals, $0 Outbound 0 deals, $0 Asia & Oceania Local 10 deals, $3.9B Inbound 1 deal, $0.1B Outbound 0 deals, $0 Globally, local deals decreased as a proportion of total deal volume, accounting for 56 percent of activity, compared to 64 percent in North America dominated the deal activity, accounting for 91 percent of global deal value and 63 percent of global deal volume in The region registered $56 billion as deal value and 27 deals in volume. 91 percent of the deals in North America were local deals. This also includes the largest megadeal worth $31.5 billion, which comprised more than 60 percent of total megadeal value. UK & Eurozone ranked second with 16 deals valued at $7.2 billion in Deal activity involving China (including undisclosed deals and deals < $50 million) increased 64 percent in 2015, to 46 deals, compared to 28 deals in In the fourth quarter, North America, UK & Eurozone and Europe (excluding UK & Eurozone) witnessed significant decline of around 90 percent in their deal values. Deal volume also declined considerably in North America and UK & Eurozone by 60 and 75 percent, respectively. 7

8 Deal market characteristics Deal value was largely concentrated in the Aerospace and MRO category in 2015, with 69 percent share of total deal value for the year Deal value by Aerospace & Defense category ( ) disclosed deal value of $50M+ 100% 90% 80% 70% 60% 50% 18% 15% 29% 31% 37% 27% 25% 35% 56% 35% 7% 4% 20% 15% 16% 40% 11% 26% 5% 100% 90% 80% 70% 60% 50% Deal volume by Aerospace & Defense category ( ) disclosed deal value of $50M+ 35% 33% 33% 23% 16% 24% 23% 23% 57% 38% 19% 10% 14% 29% 18% 61% 8% 39% 40% 30% 20% 10% 67% 40% 36% 40% 11% 33% 58% 76% 69% 49% 69% 40% 30% 20% 10% 49% 43% 44% 54% 11% 32% 43% 61% 68% 9% 30% 53% 0% % Aerospace & MRO Space & other Defense Aerospace & MRO Space & other Defense Deal value was largely concentrated in the Aerospace and MRO categorized deals in percent share of total deal value. Berkshire Hathaway s announcement to acquire Precision Castparts for a value of $31.6 billion accounts for 73 percent of the total Aerospace and MRO total deal value. The Aerospace and MRO category also accounted for more than half the total deal volume in 2015, at 53 percent. The Defense category declined both in percentage of volume and value in 2015, compared to

9 Large deals Megadeals value increased more than threefold in 2015, from $13.9 billion in 2014 to $50.9 billion. Mega-deals in 2015 (deals with a disclosed value of at least $1 billion) Date announced Target name Target nation Acquirer name Acquirer nation Status Deal value ($M) Category 08/10/15 Precision Castparts Corp. United States Berkshire Hathaway Inc. United States Pending 31,595 Other 07/20/15 Sikorsky Aircraft Corp. United States Lockheed Martin Corp. United States Completed 9,000 Aircraft & Parts 02/06/15 Exelis Inc. United States Harris Corp. United States Completed 4,561 Other 09/23/15 Landmark Aviation United States BBA Aviation PLC United Kingdom Pending 2,065 Other 04/20/15 Websense Inc. United States Raytheon Co. United States Completed 1,900 Other 03/18/15 Shifang Mingri Yuhang Industry Co. Ltd. China Xinjiang Machinery Research Institute Co. Ltd. China Completed 1,804 Aircraft & Parts Two thousand and fifteen was clearly a record year for M&A value in the Aerospace and Defense sector. This was led by Berkshire Hathaway s announced acquisition of Precision Castparts and Lockheed Martin s completed purchase of Sikorsky. These deals really impacted the total megadeal value, which increased more than threefold to $50.9 billion in 2015 from $13.9 billion in Even though megadeal value did significantly increase, megadeal volume remained flat compared to Activist Investors Investors within the activist community continue to remain active in the Aerospace and Defense sector. Many hedge funds have built up significant levels of funding and have been actively deploying to drive higher returns for shareholders. Investors have been and will continue to target the A&D sector, as many companies have large cash reserves, non-strategic segments and/or portfolio gaps and limited to no organic growth opportunities. This has driven companies within the sector to take a proactive approach to unlocking value to shareholders via M&A, in efforts to craft their own strategic initiatives before being pressured by an activist investor with a specific agenda. We feel this theme of activist-driven M&A will only intensify in 2016 as more companies are going to be faced with these challenge in a sluggish global economy where shareholders continue to demand higher returns. 9

10 Methodology Mission control is an analysis of mergers and acquisitions in the global aerospace and defense industry. Information was sourced from Thomson Reuters and includes deals for which targets or acquirers have primary SIC codes that fall into one of the following SIC industry groups: 1) ordnance and accessories, except vehicles and guided missiles; 2) aircraft and parts; 3) national security; 4) guided missiles, space vehicles, and parts; 5) search, detection, navigation, guidance, aeronautical and nautical systems, and instruments and equipment (SDNGN & NS, I&E); and 6) space research and technology. This analysis includes all individual mergers and acquisitions for disclosed or undisclosed values, leveraged buyouts, privatizations, minority stake purchases, and acquisitions of remaining interest announced between January 1, 2006 and December 31, 2015, with a deal status of completed, intended, partially completed, pending, pending regulatory approval, unconditional (i.e., initial conditions set forth by the acquirer have been met but deal has not been completed), or withdrawn. The term deals, when referenced herein, is used interchangeably with transactions and announcements. Unless otherwise noted, the term deals refers to all deals with a disclosed value of at least $50 million. Regional categories used in this report approximate United Nations (UN) Regional Groups as determined by the UN Statistics Division, with the exception of the North America region (includes North America and Latin and Caribbean UN groups), the Asia and Oceania region (includes Asia and Oceania UN groups), and Europe (divided into United Kingdom, plus Eurozone and Europe ex-uk and Eurozone regions). The Eurozone includes Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain. Oceania includes Australia, New Zealand, Melanesia, Micronesia, and Polynesia. Overseas territories were included in the region of the parent country. China, when referenced separately, includes Hong Kong. 10

11 Resources PwC Aerospace and Defense practice Imagine the power of 180,000 people with a common purpose - building relationships that create value for you and your business. This is PwC. Every day, our people work with clients in the A&D industry to build the value they are looking for. Our A&D practice is a global network of over 1,000 professionals who focus on providing audit and assurance, tax and consulting services to many of the world s most successful companies. We leverage our diverse knowledge, experience, and solutions to help A&D companies meet the challenges and opportunities of doing business in the US market, and beyond. PwC s Deals practice, with approximately 6,500 dedicated deal professionals worldwide, has the experience to advise you on all factors that could affect a transaction, including market, financial accounting, tax, human resources, operating, information technology, and supply chain considerations. Teamed with our A&D practice, our deal professionals can bring a unique perspective to your transaction, addressing it from a technical as well as an industry point of view. PwC US US Aerospace and Defense Leader Chuck Marx [email protected] US Aerospace and Defense Advisory Leader Randy Starr [email protected] US Aerospace and Defense Assurance Leader Scott Thompson [email protected] US Aerospace and Defense Tax Leader James Grow [email protected] US Aerospace and Defense Deals Leader Bob Long [email protected] US Aerospace and Defense Deals Director Dale McDowell [email protected] US Aerospace and Defense Corporate Finance Director Robert Ashcroft [email protected] US Aerospace and Defense Marketing Manager Gina Reynolds [email protected] US Aerospace and Defense Research Analyst Alexander Bosco [email protected] PwC Global Brazil Aerospace and Defense Leader Augusto Assuncao [email protected] Canada Aerospace and Defense Leader Mario Longpre [email protected] China Aerospace and Defense Leader Huw Andrews [email protected] Germany Aerospace and Defense Leader Martin Theben [email protected] India Aerospace and Defense Leader Dhiraj Mathur [email protected] Italy Aerospace and Defense Leader Corrado Testori [email protected] Middle East Aerospace and Defense Leader Masood Hassan [email protected] UK Aerosapce and Defense Leader Dean Gilmore [email protected] Visit us online: PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details.