aerospace defence deals

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Industrial ProductsAerospace & Deence

Aerospace & Deence Deals*

2008 Annual Review

*connectedthinking

Merger and acquisition activity in the global aerospaceand deence industry


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Contents

Methodology

Aerospace & Deence Deals 2008 is based on published transactions rom the Dealogic M&A Globaldatabase, January 2009. Analysis encompasses only those deals which were completed in the calendaryear. Deal values are the consideration value announced or reported, including any assumption o debt andliabilities. Figures relate to actual stake purchased and are not multiplied up to 100%. The geographical splito the deals reers to the location o the target company. The analysis relates to the aerospace and deencedevelopment, manuacturing and services sectors, and thereore excludes commercial airlines. The analysisincludes targets in commercial and military aerospace, deence, homeland security and space. Data or

earlier years may dier slightly to that appearing in previous editions o our annual analysis as a result o reshinormation, renements in methodology and consequent restatement o the input database. A ull list otransactions throughout 2008 is available by visiting the Aerospace & Deence Deals website atwww.pwc.com/aerospaceanddeence/deals.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 01

Report highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 02

Deal totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 04

Deal makers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 06

Deal places . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 09

North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Rest o the world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Looking ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Contact us . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17


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Aerospace & Deence Deals

Ater fying high inprevious years,aerospace and deence(A&D) deal-makingdescended ast in 2008.

Indeed, the last threemonths o the year sawactivity virtually dry upas concerns about thenancial and economicbackground worsened,civil aviation overcapacity

ears hardened and the outlook or deencesector spending remained uncertain.

Aerospace & Deence Deals 2008 reviewsdeal activity in the A&D industry. The report isthe latest edition in our annual series on deal-making in the sector, previously titled FlyingHigh. The report is one o a range o dealspublications rom PricewaterhouseCoopers,covering sectors including mining, metals,renewable energy, power, oil & gas as well asA&D. Together the amily o deals reports providea comprehensive analysis o M&A activity acrossindustries worldwide.

We examine both the rationale behind the overalltrends and look at the key individual deals. Welook at the year under review, the context othe preceding years, and ahead to the uturedirection o deal-making in the sector. We alsohighlight, in our deal dialogue panels, some othe critical issues or companies engaging in

deal activity within the sector. Drawing on ourglobal experience as an adviser to aerospace &deence industry M&A players, our commentaryaddresses all key markets in the sector.

Looking ahead, we examine the eect o a moreuncertain economic outlook on deal-makingin the sector. We look at the imperatives thatwill continue to underpin activity as well asthe actors that will inhibit deal-making. Ourconclusion is that A&D deal activity will remainsubdued and that companies are most likelyto adopt a wait and see attitude until keyconcerns about growth and nancing havebeen addressed.

Introduction 01

Neil Hampson


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Deals plummet in last quarter tailspin

Total 2008 deal value in the sector more thanhalved, down to US$14.3bn rom US$32.9bnthe year beore, and virtually dried up inthe last quarter ollowing the Autumn 2008intensication o the credit crisis and thewider economic downturn. In the last threemonths o 2008, deal value shrunk to justUS$218 million. This contrasts with the nalthree months o 2007 when A&D discloseddeal value totalled US$1.3bn. By the end o2008, it was only very small deals that weretaking place average disclosed deal valuein the last quarter was just US$22 million,way short o the decades lowest averagedeal level o US$100 million, seen in 2003.

European buyers dominatetransatlantic deal trac

North America and Europe accountedor 89% o total deal value (US$12.7bno the US$14.3bn total) and 79% o dealvolume (132 o 167 A&D deals worldwide).Transatlantic deals dominated the deal totals,accounting or US$9.7bn o deal value withUS$7.3bn attributable to European bids orNorth American targets. Indeed, the valueo 2008 European outbound activity orNorth American targets was a record highor the whole o the decade. These strategicmoves by European companies had theadded bonus o being conducted at a time orelative dollar weakness.

02 Report highlights


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Private equity investment alls oa precipice

The number o Private Equity (PE) dealsmore than halved, rom 77 in 2007 to just 31in 2008. The total value o PE deals ell oa precipice plummeting to just US$2.4bnrom US$16bn in 2007. US$2.2bn o 2008PE deal value was accounted or by just onedeal Permiras sale o Jet Aviation. In thespace o 12 months, PE deals have gonerom providing 49% o total A&D value to

just 17% (or 1.4% excluding the Jet Aviationsale). The Jet Aviation deal provided theonly US$1bn plus deal in 2008, comparedto seven such deals involving PE players theprevious year.

Deal revival horizon remains distant

Deal-making is likely to be very subduedduring 2009 with the drying-up o deals inthe last quarter o 2008 setting the tone or2009. As well as the market environmentconcerns outlined above, lack o leveragewill be a key actor constraining PE buyers.Corporate buyers will be wary until they havegreater certainty that values have bottomedout. Conservation o cash reserves will be apriority or many companies. More cash willbe needed or vendor nancing to supportcommercial aircrat sales and maintaindeliveries. Both Boeing and Airbus, orexample, have announced they intend tostep up such nancing. Unlike some otherindustries, orced selling is unlikely to be awidespread eature o deal-making althoughthe incidence o smaller companies orcedinto deals is likely to increase.

03


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Deal totals 04

A&D deal-making stalled in 2008 as companies andinvestors aced new market realities ollowing the relativehighs reached in 2006 and 2007. Total deal value inthe sector more than halved, down to US$14.3bn romUS$32.9bn the year beore, and virtually dried up in thelast quarter o 2008. The intensication o the economic

downturn and nancial crisis during 2008, allied withuncertainty on the outlook or deence spending in somecountries, led to sentiment turning negative across mucho the industry.

Taking the year as a whole, deal numbers did not takequite such a dramatic downward turn, shrinking by 23%compared with 2007. As a result, average deal value wasdown 27% with 2008s US$208 million average deal value,still signicantly higher than the US$146 million level o2005 (see Figure 1). However, much o this was driven bythe deal momentum o 2006 and 2007 continuing into the

rst quarter o 2008. The rst three months accounted or69 o the 167 deal announcements in 2008 (see Figure 2).

Ater the rst quarter, deal numbers more than halved. Dealvalue in the second and third quarters was buoyed by thetiming o three US$1bn plus deals during that period but,by the ourth quarter, deal value had shrunk to just US$218million. This contrasts with the nal three months o 2007when A&D disclosed deal value totalled US$1.3bn. By theend o 2008, it was only very small deals that were takingplace average disclosed deal value in the last quarterwas just US$22 million, way short o the decades previousUS$100 million minimum average deal level seen in 2003.

On the civil aviation ront, growing numbers o airlines areseeking to deer or cancel aircrat deliveries as they cutcapacity to try to match alling demand or air travel andair cargo. This has resulted in both Boeing and Airbusconsidering modest production cuts or either 2009 or2010. The hoped-or major growth platorm o increasingMiddle Eastern and Asian demand is increasingly being

thrown into doubt. In early 2009, or example, SingaporeAirlines, the worlds biggest carrier by market value,announced it would cut capacity by 11% in the year romApril 2009, decommissioning 17 o its 102 passengeraircrat. Reduced demand or new aircrat has started tohave a knock-on eect on SME sub-contractors, many o

whom have moved to cut capacity and costs.

On the deence ront, 2008 deal-making acedthe uncertainty o the exact implications o a newadministration in the US and, in Europe, long-awaitedFrench deence review proposals which were announcedhal way through 2008. The French white paper signalled ashit in deence priorities with a reocusing to knowledge-based security. French spending on space-basedobservation, eavesdropping and ballistic missile early-warning assets will double while armed orces will bereduced by almost a th. Likewise, a urther strategic

deence review is expected in the UK.

The early days o the Obama presidency have begun tolit uncertainty. While the uture o some major weaponsplatorms remains under review, the new president hasdismissed calls to reduce the main deence budget.Indeed, President Obama has requested a 4% boost in2010 to the Pentagon budget rom Congress but it is notexpected to be augmented by signicant supplementalbudgets as in prior years. The new president has madeclear that he wants to end overspending and scheduledelays in the US weapons programme. Ongoing militarycommitments in Aghanistan will continue to supportdemand or spares, overhauls and retrots whilewithdrawal rom Iraq will ease operational pressures onthe deence budget. The expectation is that there is goingto be a phased decline in US deence spending underthe new administration. On balance, the outlook or thesecurity and deence sectors remains sound althoughthere is likely to be a reocusing o priorities acrossdierent programmes.


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2000 2001 2002 2003 2004 2005 2006 2007 2008

Total number o deals 357 323 323 279 272 339 203 214 167

Total disclosed value o deals (US$bn) 46.0 25.8 19.9 17.2 24.0 24.4 29.2 32.9 14.3Average deal size (US$bn) 0.236 0.151 0.121 0.100 0.159 0.146 0.280 0.286 0.208

Figure 02: Quarterly fow o A&D deals, 2007 & 2008

2007

Q1 Q2 Q3 Q4

2008

Q1 Q2 Q3 Q4

Deal volume 51 60 51 52 69 33 32 33

Deal value (US$bn) 12.1 14.0 5.6 1.3 3.3 7.56 3.3 0.218

Figure 01: Total A&D deals, 2000-2008

Source: PricewaterhouseCoopers Aerospace & Deence Deals 2008 Annual Review


05


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PricewaterhouseCoopers

Deal makers 06

Large US$1bn plus deals were thin on the ground in 2008.Only three such deals eatured in the top ten A&D dealstable, the lowest number in the entire decade beginning2000. In most previous years there were typically atleast hal a dozen deals that topped the US$1bn mark.Nonetheless, the biggest deal o 2008 Finmeccanicas

US$5.6bn purchase o DRS Technologies ranks as oneo the most noteworthy o the decade both in terms o sizeand industry signicance.

Indeed, Finmeccanicas move is the third largest o thedecade. It adds a third pillar to the Italian companysexpansion in the US, adding DRSs range o deencetechnology to the presidential helicopter contract won byits AgustaWestland subsidiary and its work on the carboncomposite shell o Boeings 787 Dreamliner. In a contextwhere nationalism plays a part in deal-making, both interms o jobs and deence interests, Finmeccanica is

keeping DRSs management and headquarters and runningthe newly acquired company as a whollyowned subsidiary.

Finmeccanicas growth as an A&D player during thedecade is signicant. Back in 2000, it was an industrialconglomerate and was part-privatised by the Italiangovernment. The US$4.8bn sale released 39.3% o thecompany to the market in what was the biggest A&D dealo the year. The government retains just under 34% oFinmeccanica. Since 2000, the company has disposedo non-core assets and built a strong, ocused aerospaceand deence platorm in both Europe and the US that hascatapulted it into a strong international position vis a visEuropean and US competitors.

The second largest A&D deal o 2008 topped what wasa shrinking list o deals involving PE players (Figure 5).The US$2.2bn sale o Swiss-based Jet Aviation to USgroup General Dynamics gave Permira, a UK-basedprivate equity rm, an exit and a substantial return on itsinvestment ater acquiring the business aviation servicecompany in 2005. General Dynamics is one o the worldsleading business jet manuacturers, owning Gulstream.The deal extends the companys portolio o business

aviation services, particularly into the Middle East andAsia, putting it in a stronger position to benet rom long-term growth outside o North America.

The dearth o leverage available to private equity playershas signicantly curtailed their buy-side involvement inthe A&D deal market. Large scale buy-outs o the likes oOnex and Goldman Sachs 2006 US$3.2bn purchase oRaytheon Aircrat to orm Hawker Beechcrat, or CarlyleGroups 2007 US$2.6bn Sequa acquisition, are much

less likely in current conditions. The Jet Aviation sale wasthe only large transaction in a rapidly shrinking PE deallist where PE sell-side motivations replaced the buy-sideactivity o recent years. The number o PE deals morethan halved, rom 77 in 2007 to just 31 in 2008. The totalvalue o PE deals ell o a precipice plummeting to justUS$2.4bn (or just US$0.2bn excluding the Jet Aviationsale) rom US$16bn in 2007. In the space o 12 months, PEdeals have gone rom providing 49% o total A&D value tojust 17% (or 1.4% excluding the Jet Aviation sale). The JetAviation deal provided the only US$1bn plus deal in 2008,compared to seven such deals involving PE players the

previous year.


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07

Rank Target Target Description Bidder Target Nation Bidder NationValue($bn)

1 DRS TechnologiesInc

Supplier o deence electronicsproducts and systems

Finmeccanica SpA United States Italy 5.602

2 Jet Aviationmanagement

Aviation service company,provides maintenance, avionics,completions and engineeringservices and xed baseoperations

GeneralDynamics Corp

Switzerland United States 2.236

3 HoneywellInternational Inc

(ConsumablesSolutions Business)

Consumables SolutionsBusiness which distributes

asteners and hardware, andprovides logistic services

B/E Aerospace Inc United States United States 1.050

4 Tenix DeencePty Ltd

Company involved inshipbuilding and aerospaceparts manuacturing or thedeence industry

BAE Systems plc Australia United Kingdom .683

5 Textron Inc (Fluidand power unit)

Fluid and power unit, servingdeence and other industries

Clyde Blowers plc United States United Kingdom .645

6 Sparta Inc Provider o weapons systemsplanning, analysis and researchservices and materials researchand development services

Cobham plc United States United Kingdom .416

7 ScienticProduction CorpIrkut OAO

Aircrat manuacturer United AircratCorp UAC RussianFederation RussianFederation .726

8 Odyssey IndustriesInc; Global ToolingSystems Inc

A manuacturer o automotiveand aircrat tooling system

Hampson Industriesplc

United States United Kingdom .322

9 Northrop GrummanCorp (Electro-Optical systemsbusiness)

Electro-Optical Systemsbusiness which producesnight vision and appliedoptic products

L-3CommunicationsCorp

United States United States .175

10 Weir Strachan& Henshaw

Engineering design specialist,project manager and providero through-lie support or the

deence and nuclear industries

BabcockInternationalGroup plc

United Kingdom United Kingdom .130


Figure 03: Top ten A&D deals 2008

2000 2001 2002 2003 2004 2005 2006 2007 2008

Number o PE A&D deals 72 66 84 73 73 65 70 77 31

% o all A&D deals 20% 20% 26% 26% 27% 19% 34% 36% 19%

Value o PE A&D deals (US$bn) 10.0 7.7 4.8 4.8 5.7 6.7 15.4 16.0 2.4

% o total value o A&D deals 22% 30% 24% 28% 24% 27% 53% 49% 17%

Figure 04: Private equity deals 2000-2008



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Rank Target Target Description Bidder Target Nation Bidder NationValue($m)

1 Jet AviationManagement AG

Aviation service company,provides maintenance,avionics, completions andengineering services and xedbase operations

GeneralDynamics Corp

Switzerland United States 2,236

2 BrookhouseHoldings Ltd

Manuacturer o tools andcomponents, primarilyassociated with theaerospace, automotive andautosport industries

Kaman Corp United Kingdom United States 85

3 Hydroid LLC Manuacturer and suppliero autonomous underwatervehicles or military andcommercial markets worldwide

KongsbergGruppen ASA

United States Norway 80

4 WoodlawnManuacturing Ltd

Manuacturer orearm ammunition

Lone Star CRA Fund United States United States 25

Figure 05: Top private equity deals, 2008


08


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Deal places 09

Out o the total US$14.3bn invested in 2008, nearly twothirds (65%) was invested in North America, continuingthe trend away rom years such as 2004 and 2006 whenthere was a much more balanced prole between Europeand North America (see Figure 6). The Finmeccanicadeal ensured that deal fow across the Atlantic, withEuropean companies making US purchases, remainedstrong. Indeed, at US$7.3bn, the total value o Europeantransatlantic acquisitions was signicantly higher than theUS$2.4bn o deals by North American players investing theother way into European A&D.

Together, North America and Europe accounted or 89%o total deal value (US$12.7bn o the US$14.3bn total) and79% o deal volume (132 o 167 A&D deals worldwide).Transatlantic deals dominated North American andEuropean deal totals. US$9.7bn o the US$12.7bn dealvalue in these two main markets came rom transatlanticdeals. On both sides o the Atlantic, there were ew dealsinvolving a buyer and a target rom the same continent.This is nothing new in Europe where the limited scope othe EU market leaves less room or deals and growth, butis a big departure or North America where, in previousyears, most deals have involved North American buyers.

In 2007, North American investors accounted or 65%,US$15.5bn, o the US$23.9bn total North American A&Dvalue. In 2008, due to the impact o the Finmeccanica deal,their share was down to 20% US$1.9bn o US$9.3bn.

Deal value in the rest o the world in 2008 came closeto its record US$1.7bn level reached in 2006. There wasa year on year doubling o the value o deals or targetsin the BRIC countries but this was wholly attributableto two deals that ormed part o the restructuring o theRussian A&D industry. The rest o the world totals werealso buoyed by BAE Systems US$683 million purchase oAustralian deence business Tenix. Acquisitions by MiddleEast players in North America, which had accountedor US$1.8bn o deal value in 2007, dried up in 2008,highlighting the all in PE activity. We discuss NorthAmerican, European and the rest o the world transactions

in more depth overlea.


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10


Figure 08a: Acquisition money fows, 2008

Source: PricewaterhouseCoopers Aerospace & Deence Deals

2008 Annual Review

Figure 06: Total disclosed deal value by region (US$bn)


Figure 08b: Acquisition money fows, 2007

North America Europe$2.4bn

$7.3bn

Middle East

$1.9bn $0.9bnBalance: $4.8bn

North America Europe$6.0bn

$6.6bn

Middle East

$15.5bn $2.1bnBalance: $0.6bn

$1.8bn

Source: PricewaterhouseCoopers Aerospace & Deence Deals

2008 Annual Review

2000 2001 2002 2003 2004 2005 2006 2007 2008

29.7 12.4 13.7 8.8 8.6 15.1 14.6 23.9 9.3

15.6

0.7

12.1

1.2

25.8

46.050

40

30

20

10

0

5.8

0.4

19.9

3.4

1.7

14.3

7.8

0.7

17.2

15.0

0.4

24.0

8.8

0.5

24.4 8.2

0.9

32.9

12.8

1.7

29.2

Europe RoWNorth America

Figure 07: Total deal volume 2000-2008

2000 2001 2002 2003 2004 2005 2006 2007 2008

137 140122 102 103

148

66 6343

181

357

134

49

32339

400

300

200

100

0

157

44

323

89

35

167132

45

279

136

33

272

142

49

339

108

43

214

107

30

203

Europe RoWNorth America


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North America 11

Total North American target A&D volume ell 17%, rom108 deals in 2007 to 89 in 2008. Total deal value more thanhalved, down 61% rom US$23.9bn to US$9.3bn. Four othe top ve deals or North American targets were romEuropean bidders, together accounting or US$7bn o thetotal US$7.3bn deal value fowing into North Americarom Europe.

Apart rom General Dynamics US$2.2bn purchase oSwitzerland-based Jet Aviation(see p15), 2008 deal-making by North American A&D players was verysubdued. Indeed the year saw only one other internationalmove by a North American company Kamans US$85million purchase o UK-based tools and components

manuacturer, Brookhouse Holdings. Total deal valueinvolving North American bidders, whether at home orabroad, plummeted 80%, alling rom US$21.5bn in 2007to US$4.3bn in 2008.

On the domestic ront, the sole North American buyer inthe ve largest deals or North American targets was B/EAerospace, the worlds leading manuacturer o aircratcabin interior products and asteners/consumables, whichacquired Honeywell Internationals Consumables Solutionsin a US$1.1bn deal. The disposal by Honeywell ttedwith its strategy o ocusing on advance technologies

and, indeed, shortly beore the sale, the Honeywellaerospace unit had moved or the Caliornian-basedIntelligent Automation Corporation, a supplier o on-boarddiagnostic systems used in military and commercialaircrat. The Consumables Solutions acquisition addedto B/E Aerospaces strategy o growth in its aerospaceconsumables distribution segment and the company said italso hopes to achieve US$84 million o sales, distribution,IT and business model synergies in the rst three years othe integration.

Finmeccanicas US$5.6bn purchase o DRS Technologies(see p13) headed the inbound list ollowed by three, muchsmaller, purchases by UK companies. The second biggestdeal came rom Clyde Blowers, a UK based manuacturerand designer o pneumatic conveying systems, whichacquired the fuid and power unit o Textron, a US basedproducer o aircrat, automotive, and industrial productsand best known as the manuacturer o Cessna jets.Private equity played a signicant part in the US$645million deal, although not as direct purchasers but asbackers o the Clyde Blowers management team who hadbuilt up their own capital und rom PE sources.

The two remaining UK buyers in the top ve North

American deals list were more amiliar A&D names Cobham and Hampson Industries. Precision engineering,avionics, and fight operations company Cobham acquiredSparta, a US based provider o weapons systemsplanning, analysis and research services, or US$416million. Like Finmeccanica, Cobham said it intended tokeep the US management team in place as a strategicbusiness unit. The purchase ollowed the completedacquisition by Cobham o autopilot manuacturer S-TECand the announced acquisition o the Lansdale US sensorsand antennae business. Together these deals representa signicant stepping-up o the companys presence

in the US A&D market. Hampson Industries purchase,the US$322 million acquisition o Odyssey Industriesand Global Tooling Systems, similarly came on the backo a string o deals by the company or US aerospaceengineering targets. The latest purchases giveHampson a signicant supplier role in the BoeingDreamliner programme.


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Figure 09: North American A&D target and bidder deal activity

2007 2008%

Change

North American target

Number 108 89 (17)%

Disclosed deal value (US$bn) 23.9 9.3 (65)%

North American bidder

Number 110 90 (18%)



Finmeccanica fying high in US

Finmeccanica became a signicantsupplier to the US military in 2008 throughits acquisition o DRS Technologies, amanuacturer o a host o deence electronicsystems such as thermal weapon and

electro-optic sights, tactical computers andworkstations, naval electrical distribution onships, generators, and water purication andenvironmental control equipment used bydeployed orces.

The deal mirrors previous successes o BAESystems in developing a true home marketin the US and demonstrates the opening upo the US deence market to selected oreignprimes. DRS reported sales o US$3.2bnprior to the US$5.6bn acquisition. Moreimportantly or Finmeccanica, 90% o theacquired growth will be in the US, which isthe largest and among the astest growing

deence markets in the world.

In addition to the strong organic growth thatDRS is expected to continue to generate, thecompany is a gateway or Finmeccanicato begin introducing more o its productsinto the US market. Given Finmeccanicasstrong platorm presence in tactical airlitaircrat and helicopters, combined with DRSelectronic systems capabilities, there mayarise opportunities in the US where DRScan serve as the systems integrator andprime contractor.

Finmeccanica is not a stranger to the US

deence market and recently won theDeense Departments C-27A Joint CargoAircrat programme based on their aircratdesign. Its AgustaWestland division isalso teamed with L-3, in providing AW139medium-lit helicopters to Customsand Border Protection and is developingthe US101 the replacementUS presidential helicopter.

Finmeccanica has the ability to bolster DRSwith additional research and developmentunds and the additional opportunities thecombination will have or DRS to expand itsinternational sales. Under the deal terms,DRS operates largely independently as a

wholly owned subsidiary o Finmeccanicaand reports to its own board o directors,consisting mostly o US citizens throughthe establishment o a Special SecurityAgreement. Finmeccanica would haveresponsibility or helping DRS set strategy.

PwC deal spotlight


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Europe 13

Figure 10: European A&D target and bidder deal activity

2007 2008%

Change

European target

Number 63 43 (32)%


European bidder

Number 64 47 (25)%

Disclosed deal value (US$bn) 8.7 8.9 2%


Activity or European targets was down even more than inNorth America deal numbers ell by 32% and the totalvalue o European targets was down 59%, rom US$8.2bnin 2007 to US$3.4bn in 2008 (see Figure 10). European bidactivity was also down, by 25%, although Finmeccanicaspurchase o DRS and the activity o other European buyeractivity in North America helped to maintain a high level ototal bid value which edged up rom US$8.7bn in 2007 toUS$8.9bn in 2008.

US company General Dynamics US$2.2bn purchaseo Switzerland-based Jet Aviation (see p15) was by arthe largest 2008 deal or a European target. The onlyother US$100 million plus deal or a European target saw

Babcock International, the support services group that isincreasing its presence in deence contract work, purchaseUK-based nuclear and marine specialist Strachan &Henshaw rom the Weir Group or US$130 million.

The big story in 2008 European A&D deal activity wasthe series o North American purchases by Europeancompanies (see North America and Deal Makers sections).US$7.3bn o the total US$8.9bn value o Europeanbidder activity was or North American targets. This wasconsiderably higher than the US$4.8bn, US$1.5bn andUS$6.6bn o European acquisition money fowing into

North America in 2005, 2006 and 2007 respectively.Indeed, the total value o 2008 European outbound activityor North American targets was a record high or the wholeo the decade. European companies need a presence inthe US i they are to be global A&D players, hence themomentum or cross-Atlantic acquisitions. The fow odeals in 2008 ollows similar deals in previous years suchas BAE Systems US$4.5bn purchase o Armor Holdings.

PwC deal spotlight

General Dynamics extendscorporate jet ootprint

Aerospace rm General DynamicsCorporation moved deeper into the corporatejet market, buying Jet Aviation o Switzerland

rom its private equity owners or US$2.25billion. Jet Aviation was oundedin Switzerland in 1967 and is one o theworlds leading business aviationservices companies.

Approximately 5,600 Jet Aviation employeescater to clients needs rom 25 airportacilities throughout Europe, the Middle East,Asia and North and South America. Servicesprovided include maintenance, repair andoverhaul; completions and reurbishments;engineering; xed base operations (FBO);aircrat management, fight support andglobal executive-jet charter services;and aircrat sales, acquisitions andpersonnel services.

While General Dynamics is perhaps bestknown or its tanks, ships, submarines andother military equipment, it has signicantlyexpanded its aerospace unit, Gulstream,in recent years and now expects its feet obusiness jets to double in the next decade toroughly 30,000 aircrat. International ordersat Gulstream outpaced US sales or therst time in 2007 and the company recentlyintroduced its largest and widest-rangingjet, the G650. Orders remain strong or high

end, long range business jets such as theGulstream series and Bombardiers GlobalExpress series.

Jet Aviation generates roughly 60 percento its sales in Europe, the Middle East andAsia. By comparison, General Dynamicsaerospace unit, which includes Gulstream,has 12 service centres, with all but onelocated in the US.

The deal allows General Dynamics to takeadvantage o Jet Aviations strong presence

in the rapidly growing Middle East region.Three years ago, or example, Jet Aviationopened a 24-hour executive jet service centreat Dubai International Airport. The airport hasgrown into a key transit hub in recent yearsthanks to the Gul citys growing prominence


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14 Rest o the world

Year-on-year A&D deal volume or targets in the rest othe world dropped 19%. However, the value o discloseddeals nearly doubled, rom US$0.9bn in 2007 to US$1.7bnin 2008, just short o the 2006 record high (see Figure 11).In 2006, it was deals or targets in the BRIC countries thatuelled the totals with the US$997 million stock swap o

shares in Brazilian aerospace company Embraer leadingthe way. In 2008, however, there was negligible underlyingBRIC activity. Instead, it was two related deals totallingUS$726 million, connected with the restructuring o theRussian aerospace industry, that pushed deal values up.

The remainder o rest o the world deal value was largelyattributable to BAE Systems US$683 million purchaseo Australian deence business Tenix. The BAE Systemspurchase advances what BAE describes as its multi-homemarket business ocus, adding Australia to its other homemarkets which include the UK, US, South Arica and

Saudi Arabia. The company is integrating Tenix Deencewith its existing BAE Systems Australia operation. TheTenix acquisition adds a major naval business to the BAEportolio and strengthens the companys land capabilityoptions or equipping and supporting the AustralianDeence Force. Thales has had a similar strategy, callingit multidomestic development, including the recentpurchase o ADI in Australia. Many such new marketexpansions start with partnerships with local industrywhich are later dissolved, with Thales taking control or ullownership o the local subsidiary once local customershave recognised its legitimacy and capabilities.

The two Russian deals were the latest in a series orestructuring moves in Russia to develop the UnitedAircrat Corporation (UAC) into a national A&D champion.UAC was created in February 2006 by Russian PresidentVladimir Putin. The goal is to develop a world classcompany in order to be able to compete on a world stage,

in particular in the regional aircrat market. Both 2008deals involved the acquisition o Scientic ProductionCorporation by UAC.

On the bidder ront, total value was infated by the eect othe two Russian deals and underlying activity by BRIC andrest o the world bidders was negligible (see Figure 12).


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15

Figure 11: Rest o the world deal value (US$m), 2000-2008

2007 2008%

Change

Rest o world target

Number 43 35 (19)%

Disclosed deal value (US$bn) 0.9 1.7 92%

Rest o world bidder

Number 40 30 (25)%


Figure 12: Rest o the world A&D target and bidder deal activity



2000 2001 2002 2003 2004 2005 2006 2007 2008

45

960

117181

58

260

1,593

419

901

514

86

188

405

275

91

41

40093

174

98

58

89

63

718

60

712

25

1,245

5

408

5

650

42

38482

522

22

1,718

37

860

321,651

BRIC ASIA RoW (Europe & NA excl) Middle East

2,000

1,500

1,000

500

0


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16 Looking ahead

A constrained nancing environment, continued economicslowdown and economic recession in some countrieswill provide the background or A&D deal-making in thecoming period. In the sector itsel, concerns about globalcapacity, cancelled orders, fatter deence spending andtechnological challenges associated with the manuacture

o the new generation o super wide-bodied jets willinfuence deal-making. The cyclical slowdown in civildeliveries expected in 2011 is kicking in much sharperand sooner.

In this context, deal-making is likely to be very subduedduring 2009 with the drying-up o deals in the last quartero 2008 setting the tone or 2009. As well as the marketenvironment concerns outlined above, lack o leveragewill be a key actor constraining buyers, corporate as wellas private equity. Conservation o cash reserves will be apriority or many companies. More cash will be needed

or vendor nancing with both Boeing and Airbus, orexample, saying they intend to step up such nancing. Thelatter has announced that the amount o cash set aside orthis purpose could double in 2009.

Even i they are in a position to make purchases,companies and investors will be reluctant to buy untilthey are convinced valuations have bottomed out. Somesmaller businesses, who may have scaled-up to meetexpected demand, may nd the tide has gone out and letthem in need o buyers. Forced selling is unlikely to beas widespread eature o deal-making as in some otherindustries, although the incidence o smaller companiesorced into deals is likely to increase. Canadian and Frenchcompany Mecachrome, or example, has already comeclose to bankruptcy and has had to reorganise with newnancing commitments under the protection o the Frenchand Canadian courts.

Private equity deal strategies will change. The highlyleveraged buy-outs o previous years are likely to remainabsent. Where it plays a role, private equity investmentsare much more likely to be undertaken in concert withmanagement teams, through specically designed unds,minority investments or joint ventures. North America

will continue to be a key market or European companiesseeking expansion. Such moves are strategic and willnot necessarily be constrained by exchange rate trendsand, indeed, any continuing dollar strength willboost protability.

The jury is out on the optimal development andmanuacturing model or new platorms. The expectedsupply chain shake-up, with companies avouringoutsourcing, has been only partly proven as companiesencountered a range o problems. All eyes will be ocusedon how the Boeing 787 delivers and, in Europe, on Airbus

A400M programme which is running late. M&A activitymay be infuenced by the possibility o a back to basicsapproach or uture platorms with a degree o verticalintegration returning to avour. In Europe, sub-contractorsare oten small and, as a result, slow consolidation othe supply chain is taking place with larger players andinvestment unds buying smaller players. Away rommanuacturing, the growth o outsourcing will continue tosupport interest in service sector deals, including in thearmed orces sector in Europe.

The ocus on security and advanced technological

developments, in response to concerns over terrorism,economic resilience, cyber-crime, piracy and other threats,will continue to strengthen and provide a spur to deal-making or companies specialising in the technology andsecurity elds. In October 2008, or example, SAFRANannounced the purchase o Motorolas biometric businessunit. The market will continue to remain robust where thereare opportunities to acquire niche technologies that cancreate uture growth opportunities in the security sphere.The French deence white paper, or example, will reinorcethis trend. In the US, deence corporates are also lookingor targets with long-term programme backlog that appearto be viable under the new administration.


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Contact us 17

Neil HampsonGlobal Aerospace & Deence LeaderTel: +44 (0) 20 7804 9405Email: [email protected]

Matthew AlabasterDirector Aerospace & Deence, UKTransaction ServicesTel: +44 (0) 20 7804 9642Email: [email protected]

Guillaume RochardFrance Aerospace & Deence LeaderTransaction ServicesTel: +33 (0) 1 56 57 8208

Email: [email protected]

Andrew Cristinzio Partner Aerospace & Deence USTransaction ServicesTel: +1 (703) 918 1474Email: [email protected]

Chandra ChudamaniDirector Aerospace & Deence USTransaction ServicesTel: +1 (703) 918 1482Email: [email protected]

Miriam PozzaPartner Aerospace & Deence CanadaTransaction Services

Tel: +1 (514) 205 5286Email: [email protected]

Darren JukesDirector Aerospace & Deence UKCorporate FinanceTel: +44 (0) 20 7804 8555Email: [email protected]

Katrine EllingsenGlobal Aerospace & DeenceMarketing DirectorTel: +1 (514) 205 5066Email: [email protected]

BrazilAugusto AssuncaoTel: +55 (19) 3794 5408Email: [email protected]

Canada

Mario LongprTel: +1 (514) 205 5065Email: [email protected]

CanadaKatrine EllingsenTel: +1 (514) 205-5066Email: [email protected]

CEEStewart BlackburnTel: +48 (22) 746 7143Email: [email protected]

CEEAndrzej KarkoszkaTel: +48 (22) 746 7142Email: [email protected]

CEEAdam BergmannTel: +48 (22) 746 7141Email: [email protected]

France

Guillaume RochardTel: +33 156 57 8208Email: [email protected]

GermanyJrgen SeibertzTel: +49 211 981 2845Email: [email protected]

IndiaDhiraj MathurTel: +91 11 4115 0309Email: dhiraj,[email protected]

ItalyCorrado TestoriTel: +39 (06) 5702 52442Email: [email protected]

USSkip (Daniel) McConeghyTel: +1 (312) 298 4343Email: [email protected]

US

Scott Thompson (Assurance)Tel: +1 (860) 240 2153Email: [email protected]

USTim Slapnicka (Assurance)Tel: +1 (860) 241 7420Email: [email protected]

USJames W Thomas (Advisory)Tel: +1 (202) 414 1370Email: [email protected]

US Aerospace & Deence MarketingCarol J ZielinskiTel: +1 (312) 298 3199Email: [email protected]

Global Aerospace & Deence Deals Team

Territory Contacts

Acknowledgements

Data analysis or this industry summary was provided by Ben Mitchell in the PwC UK Corporate Finance Group, and the report was written byDominic Byrne (The Bigger Picture Consultancy). Thanks go to Andrew Cristinzio, Barry Jaber, Chandra Chudamani and Guillaume Rochard or theircontributions to developing the A&D industry perspectives presented in this paper. Thanks also to Erica McEvoy and Katrine Ellingsen or providingmarketing support to launch the paper and to our assurance design team or design and production.


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