Activity in the global Aerospace & Defence (A&D) sector gained momentum in the second half of 2017 following a relatively sombre start to the year. However, September saw two industry-transforming transactions in the US – UTCs intention to buy Rockwell Collins for £24bn and Northrop Grumman’s announced acquisition of Orbital ATK for £7bn.
These mega deals tilted the scales and deal activity reached a near record high of £34bn in Q3, just shy of the highest achieved in Q3 2015 of £35bn - almost four times higher than the quarterly average of £9.7bn.
Below is a review of the trends that underpinned deal activity in 2017. Looking ahead, we predict M&A will continue to be important to the A&D sector as companies look to diversify across markets and product lines, while turbo charging growth to create shareholder value.
1. Private equity continues to be a key player
Private Equity (PE) interest in the A&D sector has ticked up over the last five years and is being driven by several underlying trends, including supply chain collaboration, technological innovation and continued investment into capacity and capability. With no sign of these trends abating, we have seen and continue to expect strong interest from PE for UK A&D assets. During the summer months, two key PE transactions stood out. Liberty Hall Capital’s acquisition of Dunlop Aircraft Tyres, a designer and manufacturer of aircraft tyres (June 17), is their fourth in the UK and Platinum Equity’s acquisition of Pattonair, a provider of supply chain management solutions to the A&D markets (August 17), gives them exposure to the aftermarket with a range of blue-chip engine and MRO customers.
2. The rise of challengers from the East
China's aerospace industry has advanced at an impressive rate over the past decade and the production of Comac C919, a narrow-body twinjet airliner, is causing debate among industry experts regarding the potential impact on the existing duopoly order. Despite the celebrations of a ‘Made in China’ jet, the reality is that Comac leaned on the experience of Western suppliers in order to achieve its maiden flight in May 2017. In order to avert this in the future, we are seeing Chinese companies disturb the existing supply chain. In September, Chinese Investment firm Zhejiang Science & Technology Investment Co (ZTC) acquired UK-based Acro Aircraft seating for £55m, giving ZTC access to intellectual property, industry leading technology and access to the European supply chain. Prior to this, in April Shaanxi Ligeance Mineral Resources Co acquired Derby-based aerospace parts manufacturer Gardner Aerospace for £326m. This will allow the two companies to consolidate their advantages and provide first-class supply chain services to China’s domestic aviation industry.
3. The year of mega-mergers in A&D
Despite a slow start for M&A in the A&D sector, activity picked up in Q3 as two mega deals were announced: United Technologies Corporations’ (UTC) $30bn acquisition of Rockwell Collins, the second largest in industry history, and Northrop Grumman’s $9bn acquisition of Orbital ATK, which also falls in the top ten largest deals in industry history. The Rockwell Collins acquisition is attributed to the commercial aerospace supply chain requiring greater scale in response to increased price pressures from OEMs. Further to these two mega-deals, in April Rockwell Collins bought B/E Aerospace, a cabin-interiors specialist, for $8.6bn and two months later, Safran agreed to buy Zodiac, a specialist in aircraft seats, for $7.7bn
4. Capability expansion driving MRO M&A activity
The favourable financial impact of airline consolidation in North America over the last five years has been well documented on balance sheets, with a series of mergers and acquisitions credited for being the catalyst for improving profitability for airlines. On the flipside, the effects of consolidation have not been so profound in the commercial aftermarket sector despite companies performing robustly and remaining in good health. We therefore expect to see further consolidation amongst MROs as firms look to drive inorganic growth and seek to expand offerings by adding further strings to their bow. A number of recent significant deals underpins this notion – French engine maker Safran’s $9bn acquisition of compatriot Zodiac Aerospace, a manufacturer of seats, toilets, emergency equipment and other cabin items, and AC&A's (portfolio company of AE Industrial Partners) acquisition of Applied Composites Engineering, a provider of aviation maintenance, repair and overhaul services.
5. Industrialised Additive Manufacturing
Additive Manufacturing (AM), commonly known as 3D-printing, is on the verge of being widely adopted in industrial manufacturing and the A&D sector. The world’s leading suppliers have taken note and are making ambitious moves to capture their share of its potentially huge value. For example, in 2016 GE acquired two leading companies that specialise in metal-based AM technology, this will help GE improve its ability to make fuel nozzles for its next generation turbofan engines. More recently, Moog Inc. acquired a 70% stake in Linear Mold and Engineering, a company that specialises in metal additive manufacturing serving customers across a range of industries including Aerospace & Defence.