pwc aerospace defense industry mergers acquisitions q4 2015

8/18/2019 Pwc Aerospace Defense Industry Mergers Acquisitions q4 2015

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Mission control

Highlights

Executive summary

Deal activity

Deal market characteristics

Large deals

Methodology

Fourth-quarter 2015 aerospace and defenseindustry mergers and acquisitions analysis

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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 asexpectations for deal activity in 2016.

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 2007. Deal volume declined 20 percent in 2015, to 43 deals, over the same period. Average dealsize more than tripled to $1.4 billion in 2015, compared to 2014. However, 2015 experienced increasedactivity in undisclosed deals and deals valued under $50 million, specifically in China which increasedto 46 deals, compared to 28 deals in 2014. The fourth quarter declined in deal value by 50 percent, to$2.1 billion, compared to Q4 2014 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 valueincreased from $2.3 billion in 2014 to $8.5 billion in 2015. The megadeal average was driven primarily by the largest deal announced in 2015 - 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 PwCanalysts 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 aerospacemarket and PCP’s current position on key commercial growth platforms, high margins, and stable freecash 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 thecompany to focus solely on providing high-technology systems and services, resulting in thedivestiture 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’srationalized focus, as predominantly a mission-focused air and space platform provider, whileallowing the deployment of large cash reserves. Lockheed Martin has already announced, in January2016, to divest its IS&GS (Information Systems & Global Solutions) business in a transaction withLeidos through a Reverse Morris Trust technique, which provides Lockheed with $1.8 billion andLockheed shareholders will receive roughly 50.5 percent of the combined company.

Chuck MarxUS Aerospace &Defense Leader

To our Mission control readers

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This deal defines Lockheed’s strategy to reshape their portfolio makeup for the future and could spurfurther megadeals in 2016. Commercial aerospace companies reducing their exposure to decliningdefense budgets and Tier 1 and Tier 2 defense supplier consolidation, seeking cost efficiencies, should be a continued theme in 2016.

Increased cyber attacks, threats of terrorism, and greater geopolitical instability continue to driveactivity towards targets with capabilities in electronic warfare, C4ISR (Command, Control,Communication, Computers, Intelligence, Surveillance and Reconnaissance) and cybersecurity. Thesecapabilities are more attractive for A&D investors that are looking to align and strengthen theirdefense technology portfolios. The acquisition of Exelis Inc. by Harris Corp. valued at $4.5 billion wasan expected consolidation of Tier 1 suppliers within the defense electronics segment. This deal nowexpands Harris’s defense portfolio to include electronic warfare capabilities, along with positioningthem 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 expandand strengthen their portfolios and capabilities to better protect companies from cyber-attacks anddata theft.

PwC’s Aerospace & Defense practice is monitoring several additional trends expected toaffect the characteristics of deals in the sector:

• US defense portfolio alignment. Defense contractors continue to look for opportunities forgrowth and cost reductions, however, the United States and European governments continue todiscourage further prime contractor consolidation. This means further defenses acquisitions aregoing 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 governmentservices sector. Government services will consolidate by 25 - 50 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 andcompetitiveness. We expect the industry to consolidate, to a half dozen large companies of $5 - $10 billion in revenue.

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• Financial investor activity. Stable revenue generation and a noteworthy order backlog forcommercial airplanes continues to attract private equity and financial buyers to the sector. M&Aactivity among financial investors is expected to continue as they target companies with disjointedportfolios 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 growthplatforms, best represented by Berkshire Hathaway’s acquisition of Precision Castparts.

• Supply chain consolidation. Commercial OEM’s and large Tier 1’s are demanding moreintegrated systems and complete sub-systems from the fragmented supply base, as the industryembarks upon a historic aircraft delivery ramp. An example of this consolidation of Tier 1 suppliersis 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 servicescapabilities, expanded geographic reach and margin expansion continues to drive strategicinvestors 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 presentsan 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 thesector 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 continueto face budget uncertainty and greater threats of terrorism and geopolitical unrest, companies may

continue to strengthen their commercial aerospace platform exposure and defense capabilities focusedon electronic warfare, C4ISR and cybersecurity. We expect activity in the A&D sector to proceed at ahealthy 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 athttp://www.pwc.com/us/missioncontrol for a deeper dive into the data, or contact us to furtherdiscuss our insights.

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Deal activity

Two thousand and fifteenwas a record year in M&A for the A&D sectorwith a total deal value of$61.7 billion (for deals>$50M) , nearly threetimes the value in 2014and more than 50 percenthigher than the previousrecord year in 2007.

Deal volume and value (2006-2015) – all deals

10-year historical deal value and volume table – all deals

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Total Deal Value ($ bil) 22.2 41.3 23.1 9.1 13.4 30.0 22.0 14.3 24.3 62.8

Number of Deals 228 291 306 270 289 299 297 258 306 350

22.2

41.3

23.1

9.113.4

30.0

22.0

14.3

24.3

62.8

0

50

100

150

200

250

300

350400

0

10

20

30

40

50

6070

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

D e a l v o l u m e

D e a l v a l u e ( $ b i l )

Total deal value ($bil) Number of deals


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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 ofcompleted/partially completed deals accounted for 40 percent ($24.6 billion) of the total deal value in2015. 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 2015. On an annualized basis, volume of pending, unconditional, and intended deals increased by 30 percent (from ten deals to 13deals) while volume of completed/partially completed deals declined by 32 percent (from 44 deals to30 deals) compared to 2014. In the fourth quarter, volume of deals declined by more than 40 percenton a year-over-year basis.

44

30

3

10

13

6

0

10

20

30

40

50

60

2014 2015 2015 Q4

D e a l v o l u m e

Pending, Unconditional, Intended

Completed, Part comp

Deal value increasedby 160 percent in the A&D sector despite a20 percent decline involume in 2015,compared to 2014.

Total deal value, by status (2014-2015) – discloseddeal value of $50M+

Total deal volume, by status (2014-2015) – discloseddeal value of $50M+

18 25

6

37

20

10

20

30

40

50

60

70

2014 2015 2015 Q4

D e a l v a l u e ( $ B )

Pending, Unconditional, Intended

Completed, Part comp

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Deal activity


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Globally, local deals decreased as a proportion of total deal volume, accounting for 56 percent ofactivity, compared to 64 percent in 2014.

North America dominated the deal activity, accounting for 91 percent of global deal value and 63percent of global deal volume in 2015. 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 largestmegadeal 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 2015. Deal activity involving China(including undisclosed deals and deals < $50 million) increased 64 percent in 2015, to 46 deals,compared to 28 deals in 2014.

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.

South America

Local – 0 deals, $0

Inbound – 0 deals, $0

Outbound – 0 deals, $0

Africa/Undisclosed

Local – 0 deals, $0



UK & Eurozone

Local – 5 deals, $1.7B

Inbound – 7 deals, $2.4B

Outbound – 4 deals, $3.1B

Asia & Oceania


Inbound – 1 deal, $0.1B


North America


Inbound – 4 deals, $3.1B

Outbound – 8 deals, $2.5B

M&A global map for 2015 deals – disclosed deal value of $50M+

Europe ex-UK& Eurozone

Local – 1 deal, $0.1B



North Americadominated the dealactivity, accounting for 91 percent ofglobal deal value and63 percent of globaldeal volume in 2015

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Deal value was largely concentrated in the Aerospace and MRO categorized deals in 2015 - 69 percentshare of total deal value. Berkshire Hathaway’s announcement to acquire Precision Castparts for a valueof $31.6 billion accounts for 73 percent of the total Aerospace and MRO total deal value. The Aerospaceand MRO category also accounted for more than half the total deal volume in 2015, at 53 percent. TheDefense category declined both in percentage of volume and value in 2015, compared to 2014.

49%43% 44%

54%

32%

43%

61%68%

30%

53%

16%24% 23%

23%

11%

19%

29% 18%

9%

39%

35% 33% 33%

23%

57%

38%

10%14%

61%

8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Aerospace & MRO Space & other Defense

Deal value waslargely concentratedin the Aerospace and MRO category in2015, with 69 percentshare of total dealvalue for the year

Deal value by Aerospace & Defense category(2006-2015) – disclosed deal value of $50M+

Deal volume by Aerospace & Defense category(2006-2015) – disclosed deal value of $50M+

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67%

40%36%

40%33%

58%

76%69%

49%

69%

15%

31%

27%

35%

11%

7%

20%

16%

11%

5%

18%

29%

37%

25%

56%

35%

4%15%

40%

26%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Aerospace & MRO Space & other Defense



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Mega-deals in 2015 (deals with a disclosed value of at least $1 billion)

Dateannounced Target name Target nation Acquirer name Acquirer nation Status

Deal value($M) Category

08/10 /15 Precis ion Castpar ts Corp. Uni ted States Berkshi re Hathaway Inc. Uni ted 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 MingriYuhangIndustry Co. Ltd.

China Xinjiang Machinery ResearchInstitute 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 Defensesector. This was led by Berkshire Hathaway’s announced acquisition of Precision Castparts andLockheed Martin’s completed purchase of Sikorsky. These deals really impacted the totalmegadeal value, which increased more than threefold to $50.9 billion in 2015 from $13.9 billionin 2014. Even though megadeal value did significantly increase, megadeal volume remained flat

compared to 2014.

Activist Investors

Investors within the activist community continue to remain active in the Aerospace andDefense sector. Many hedge funds have built up significant levels of funding and have beenactively deploying to drive higher returns for shareholders. Investors have been and willcontinue to target the A&D sector, as many companies have large cash reserves, non-strategicsegments and/or portfolio gaps and limited to no organic growth opportunities. This has drivencompanies 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 activistinvestor with a specific agenda. We feel this theme of activist-driven M&A will only intensify in2016 as more companies are going to be faced with these challenge in a sluggish global economy where shareholders continue to demand higher returns.

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Megadeals valueincreased more thanthreefold in 2015, from $13.9 billion in2014 to $50.9 billion.

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Large deals


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Mission control is an analysis of mergers and acquisitions in the global aerospace and defense industry. Information wassourced from Thomson Reuters and includes deals for which targets or acquirers have primary SIC codes that fall into one ofthe 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 andnautical 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 andDecember 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 otherwisenoted, 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 Eurozoneand 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 theregion of the parent country. China, when referenced separately, includes Hong Kong.

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Methodology


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Resources

PwC Aerospace and Defense practice

Imagine the power of 180,000 people with a common purpose - buildingrelationships 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 onproviding audit and assurance, tax and consulting services to many of the world’smost successful companies. We leverage our diverse knowledge, experience, andsolutions 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 atransaction, including market, financial accounting, tax, human resources,operating, information technology, and supply chain considerations. Teamed withour A&D practice, our deal professionals can bring a unique perspective to yourtransaction, addressing it from a technical as well as an industry point of view.

PwC US US Aerospace and Defense LeaderChuck Marx—[email protected]

US Aerospace and Defense Advisory LeaderRandy Starr—[email protected]

US Aerospace and Defense Assurance LeaderScott Thompson—[email protected]

US Aerospace and Defense Tax LeaderJames Grow —+1.703.918.3458

[email protected]

US Aerospace and Defense Deals LeaderBob Long—+1.703.918.3025

[email protected]

US Aerospace and Defense Deals DirectorDale McDowell—[email protected]

US Aerospace and Defense CorporateFinance DirectorRobert Ashcroft—[email protected]

US Aerospace and Defense Marketing ManagerGina 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 LeaderMario Longpre—[email protected]

China Aerospace and Defense Leader

Huw Andrews—[email protected]

Germany Aerospace and Defense LeaderMartin Theben—[email protected]

India Aerospace and Defense LeaderDhiraj Mathur—[email protected]

Italy Aerospace and Defense LeaderCorrado Testori—[email protected]

Middle East Aerospace and Defense LeaderMasood Hassan—[email protected]

UK Aerosapce and Defense LeaderDean Gilmore—[email protected]

© 2016 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 www.pwc.com/structure for further details.
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pwc aerospace defense industry mergers acquisitions q4 2015

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