Led by Harris Corp.’s [HRS] pending $5 billion acquisition of Exelis Inc. [XLS], aerospace and defense merger and acquisition (M&A) value in the first quarter of 2015 picked up in terms of overall deal value, although the number of deals slackened, according to the consulting firm PricewaterhouseCoopers (PwC).
There were nine announced deals price at $50 million or more in the opening quarter worth a combined $8.5 billion versus 13 deals worth a total of $3.5 billion a year ago, PwC says in its latest issue of Mission control, its quarterly analysis of M&A activity in the aerospace and defense industry. The Harris acquisition of Exelis is the largest in the sector since United Technologies [UTX] agreed in 2011 to acquired Goodrich for $18 billion.
“The Pentagon continues to maintain its strict stance on deals restrictions among defense primes to maintain the competition level and will scrutinize other lower-tier deals,” Chuck Marx, PwC’s US aerospace and defense leader, said in a statement. “We are cautiously optimistic that activity among smaller- and mid-tier suppliers will continue to drive transaction activity in the A&D sector.”
PwC says that divestitures and spin-offs were popular in the first quarter of 2015, primarily due to lower defense spending as aerospace and defense companies as well as multi-industrial firms focus on higher margin businesses.
Trends likely to impact values and locations of deals in the industry include supply chain pressure, demand for products and services in strategic growth areas, particularly intelligence, surveillance, and reconnaissance, private equity interest in “high-quality assets with annuity-style revenue streams and diversified customer bases or niche capabilities,” potential for excess cash to spur deals, and activity in the maintenance, repair and overhaul market due to “low fuel prices and robust aircraft utilization rates,” Marx said.
“The deal-making outlook for the A&D sector looks to improve on optimism regarding commercial aerospace, including rising demand for business jet and aftermarket services, even as high valuations and an uncertain budget outlook have restrained M&A deals in the sector,” Marx said. “As shared in recent reports, M&A valuations have helped drive a high rate of divestitures among defense companies. At the same time, some executives have specifically cited valuations as a source of concern when considering whether their companies can create value from potential acquisitions.”