Global Aerospace SectorM&A updateSummer 2012   M&A shaping the      M&A returns to pre-financial crisis levels   global ae...
Global Aerospace Sector                           M&A update                                            OEMs are looking t...
Global Aerospace Sector    M&A updateTier 1 supplier consolidation an imperative                                          ...
Global Aerospace Sector                                  M&A update    Cross-border deals  now account for over           ...
Global Aerospace Sector                                    M&A updateSupply chain globalisation                           ...
Global Aerospace Sector                    M&A updateImportance of China’s  aerospace industry    The rise of China       ...
Global Aerospace Sector           M&A updateAircraft OEMs looking to improve margins                                      ...
Global Aerospace Sector                                                   M&A update      Average EBITDA      Tier 3 and 4...
Global Aerospace Sector                                 M&A update  Figure 8: Selected recent aerospace M&A transactions  ...
Global Aerospace Sector                        M&A update           Positive outlook    Prospects for M&A                 ...
Global Aerospace Sector                        M&A update  Figure 10:                            Cash positions and M&A sp...
International experience    Through our international partnership, Mergers Alliance, Catalyst Corporate Finance provides: ...
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Catalyst Global Aerospace M&A Report 2012

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Our Summer 2012 Global Aerospace industry sector note, written in conjunction with leading aerospace expert ICF SH&E outlines key issues and pressures within the aerospace supply chain and identifies the drivers behind M&A activity in the sector moving forward.

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Catalyst Global Aerospace M&A Report 2012

  1. 1. Global Aerospace SectorM&A updateSummer 2012 M&A shaping the M&A returns to pre-financial crisis levels global aerospace The commercial aerospace supply chain industry is currently enjoying a period of significant growth as it experiences rising passenger levels and transitions to the next generation of aircraft. The emerging markets are the primary drivers of growth and “Almost every part of the aerospace accounted for more than half supply chain is undergoing change. of global airline traffic growth We are seeing various M&A during the last decade. The strategies being employed to Asia-Pacific region in particular now accounts for over 40% of capitalise on these changes” all announced airline orders. Mark Humphries, Partner Greater efficiency, better environmental The transition to next generation aircraft Demand for civil performance and demand for improved and changes in OEM supply chain cabin experience are driving the transition to strategies means that fewer Tier 1aircraft underpinning the next generation of aircraft. Underpinning suppliers are being used on new growth all of this is aviation’s aim of halving its platforms such as the B787 and A350. carbon emissions by 2050. As a result, Tier 1 suppliers are having to pursue horizontal acquisition The future of the aerospace sector looks strategies to consolidate across bright, but there are some real challenges. the supply chain to maintain their Airbus and Boeing order backlogs have market positions. never been higher, around seven years’ production, which are creating pressures As supply chains have globalised, across the global supply chain (see OEM and supplier investment levels Figure 1) as well as changing the basis Catalyst Corporate Finance LLP 2012 have increased around the world. Consolidation key of competition. Cross-border acquisitions now account for a third of all transactions, with an to suppliers’ These factors have all contributed to the increasing number involving businesses highest level of M&A activity since 2007 (a competitiveness from emerging economies. historical M&A peak) with over 200 deals in the last 12 months. This trend is set to continue for a number of reasons:
  2. 2. Global Aerospace Sector M&A update OEMs are looking to expand their Increasing technical and supply chain aircraft service offering to address a demands by OEMs and greater global growing demand from operators, competition are forcing Tier 3 and 4 to secure more revenue through the suppliers to pursue M&A through both aircraft life cycle and to achieve higher horizontal and vertical integration. operating margins. In particular, they are seeking to expand involvement Private equity firms have been active in maintenance, repair and investors in the sector, holding around overhaul (MRO) to achieve this, via a 120 aerospace businesses within their mix of acquisitions, joint ventures and portfolios. Given that 40 have been held organic growth. for five years or more, we expect an increasing number of these investments to be exited within the short term. Figure 1: The Aerospace Supply Chain Commercial Airlines Military Operators BGA Operators Aircraft operators Aerospace Engine OEMs Aircraft OEMs OEMs Civil and Military Engine Module System & Aerostructures Suppliers Suppliers Tier 1 Systems Integration Increasing Increasing value volume of parts / of parts systems Principal Component Manufacture Tier 2 Sub-assembly manufacture Tier 3 Make-to-print components Sub-Component Manufacture Tier 4 Materials and processes Raw Material Suppliers, Casting and FoundrySource: ICF International Catalyst Corporate Finance LLP 2012
  3. 3. Global Aerospace Sector M&A updateTier 1 supplier consolidation an imperative Supplier consolidationOEM supply chain strategies have opportunities for many smaller Tier 1 underway, but farchanged markedly over the last businesses. Sharing complimentary from completedecade. To protect ship set values, technologies and R&D, as well as operatingTier 1 suppliers have had to adapt their a global aftermarket support network, arebusinesses and increasingly seek necessary now to deepen relationshipsconsolidation opportunities. with OEMs. Over the last 18 months, we have seen a range of consolidation deals which have helped the aquirers increase their ship set values per platform. These include TransDigm’s acquisitions of McKechnie, Schneller and AmSafe (TransDigm has completed 25 aquisitions over the last 5 years). And Goodrich’s aquisition of Microtecnica, the Italian specialist in actuation systems and thermal control. We expect these deals to continue untilThe principle change has centred on OEM’s most segments have consolidated, which inrationalising their supplier bases across all our view is still some way off.production areas whether aero structures,engines or systems, avionics or interiors.Rolls-Royce for example used over 250suppliers on their Trent 500 engines back in2002 compared to less than 50 on theirlatest engine, the Trent XWB.The transition to the next generation ofaircraft has also influenced the spendingpatterns of OEMs. On the B777, which waslaunched in 1995, 75% of the componentMRO spend was with 15 supplierscompared to only 5 suppliers on the B787, “The drive by aircraft OEMs tolaunched in 2009. This will further reduce reduce their supplier base andwhen UTC’s acquisition of Goodrich officially to outsource development spendcompletes – the largest aerospace deal ever. and investment risk, has broughtConsequently, OEMs require Tier 1 significant new challenges tosuppliers to provide more complete system the Tier 1 and Tier 2 suppliersolutions on each new platform. Redefinedsystem architectures which reduce design businesses”redundancies and optimise aircraft David Stewart, ICF Internationalperformance are narrowing the Catalyst Corporate Finance LLP 2012
  4. 4. Global Aerospace Sector M&A update Cross-border deals now account for over Deal Analysis: Meggitt / Pacific Scientific a third of all M&A Meggitt acquired Pacific Scientific Aerospace (PacSci) from Danaher Corporation in April 2011 for £440m at a valuation equivalent to 8.7x historic EBITDA There were a number of strategic rationales for the deal: created an integrated fire and smoke detection and suppression capability enhanced ability to provide electric systems strengthened portfolio of sensors and anti-icing products shared common platforms with “The acquisition will enhance complementary products Meggitt’s offering of electric increased ship set values on major aircraft solutions as aircraft of civil and military aircraft, including key the future shift away from growth platforms such as the Boeing hydraulic /pneumatic technology 787, Airbus A380, A350 and A400M towards electric power” enhanced low cost manufacturing capability with factories in Mexico Terry Twigger, Chief executive and Vietnam Figure 2: Global aerospace deals 250 40% 35% 200 30% % cross border deals Number of deals 150 25% Cross border 20% Domestic 100 15% % of cross-border deals 10% 50 5% Catalyst Corporate Finance LLP 2012 0 0% 2007 2008 2009 2010 2011 2012 (5 months)Source: Catalyst Corporate Finance, CapIQ
  5. 5. Global Aerospace Sector M&A updateSupply chain globalisation Inbound and outboundleading to cross-border M&A M&A deals in emerging markets risingAs supply chains have globalised to by the Government of Brunei), Libertyaddress changing demands around the Aerospace is owned by the Kuwait Financeworld, so have investment patterns, House of Bahrain, and EPIC Aircraft is nowespecially with regards to M&A. owned by Engineering LLC of Russia.Over a third of all aerospace M&A is now Most current investment from Europe andcross-border (Figure 2). Whilst this activity is North America into emerging markets tendsstill largely contained within the North to be direct investment in manufacturingAmerican and European regions (as Figure and aircraft support facilities aimed at3 indicates) we are seeing more inbound improving proximity to local markets andand outbound acquisition activity in capitalising on lower cost manufacturingemerging markets. locations. This approach has underpinned earnings growth for many aerospaceIn some segments, owners outside of suppliers.Europe and North America are nowcommon, as is the case in General Aviation. However, as the indigenous aerospaceCirrus Aircraft and Continental engines are industry matures in China, Brazil, India,owned by the Chinese government Mexico and Russia, we expect to see(see ‘The rise of China’ on the next page), increasing levels of M&A activity involvingPiper Aircraft is owned by Imprimis (owned local businesses within these countries. Figure 3: Aerospace M&A heat map by country – 2007 to 2012 Bidder Country m do Number of Deals s s ng d nd al UA l an e y Ki or e a rl a n an da lD al i r e ap ia de Au ia rs tze d an e ina nc in m l na ite str str ss ae ia he th ta A E ng e ly a r p i a US Sw d Sw Ge Un Ca Ne Ch Ru Au Sp To Ita Isr Ja Ot Fr Si In USA 465 41 11 5 11 3 3 3 2 1 2 2 6 1 1 2 5 564 United Kingdom 42 111 3 3 4 1 1 2 2 1 1 1 1 2 6 181 France 10 7 40 2 1 2 62 Germany 5 4 5 28 1 3 1 1 1 1 1 1 52 Canada 10 1 4 16 1 1 33 Spain 1 1 11 1 1 1 16 Netherlands 2 1 1 4 6 1 2 2 1 20 China 3 1 12 16 Target Country Sweden 3 1 4 India 2 7 9 Japan 1 2 1 4 8 Singapore 2 4 6 Switzerland 1 2 4 1 8 UAE 0 Italy 1 5 1 1 1 6 15 Israel 1 1 1 3 Catalyst Corporate Finance LLP 2012 Austria 1 2 4 1 1 9 Russia 1 6 7 Australia 1 1 1 1 2 1 7 Others 12 4 2 2 3 2 2 1 1 4 2 1 24 60 Total Deals 557 176 71 48 31 19 16 18 12 13 11 12 8 8 9 8 7 12 6 38 1080Source: Catalyst Corporate Finance
  6. 6. Global Aerospace Sector M&A updateImportance of China’s aerospace industry The rise of China a number of joint ventures and collaborative relationships including Xian Rolls-Royce Aerocomponents (XRA) in increasing China will be the most significant Xian. Meggitt opened a sensors, valves country for the aerospace industry and polymer seals facility in Xiamen in over the next 20 years. Annual traffic 2004 which has grown steadily to employ growth is expected to average around 130 people and includes manufacturing, eight per cent and it is likely to lead engineering and supply-chain the rest of the world in volumes of management. aircraft and engine purchases. OEMs have consequently made significant Whilst proximity to the market is vital, investments across the country over OEMs have also been able to leverage the last 15 years (see Figure 4) and are comparative advantage of labour costs. planning more. Manufacturing capabilities across the supply chain are growing as the Rolls-Royce has offices in Beijing, indigenous aircraft industry develops. Shanghai, Dalian and Hong Kong and has Figure 4: Selected Aerospace Investment in China Harbin Harbin Shengyang Xian Harbin Xian Xian Tianjin Tianjin Shanghai Chengdu Chengdu Shanghai Nanjing Suzhou Xiamen Suzhou Xian Shanghai Shanghai Suzhou Source: ICF International Chinese companies have also started to (2009), piston engine OEM Continental invest overseas. State-owned Aviation Motors (2011) and the iconic GA aircraft Catalyst Corporate Finance LLP 2012 Industry Corporation of China (AVIC) has OEM Cirrus (2011) for £125m. In 2010, it made a number of notable acquisitions acquired (and since sold) the design rights including aerostructures supplier Fisher to certified EPIC Aircraft. Advanced Composite Components
  7. 7. Global Aerospace Sector M&A updateAircraft OEMs looking to improve margins Expect furtherby expanding service revenues acquisitions by aircraft OEMsAircraft OEMs are under increasing operators such as British Airways,pressure to improve their operating China Southern and Singapore Airlines.margins, which are typically below 10% They recently acquired the Danishand on average much lower than engine supply chain specialist Satair forOEMs and Tier 1 suppliers. £309m, which provides them with a global service network. Through parentTo achieve this, they are targeting a much company EADS, Vector Aerospace wasgreater proportion of their revenues from acquired in June 2011, which is one ofservices. EADS for example, is targeting a the leading rotary wing and turbine25% operating margin by 2020 (10% today) engine MROs.which is still some way behind engine OEMsand other suppliers (>40%). In 2006, Boeing acquired Aviall, which was the largest independent serviceEqually, on the next generation of aircraft, parts distributer globally. Since then,most operators will not reach a critical fleet they have continued expanding theirsize to sustain their own inventory levels MRO network. Construction began lasteconomically. This has presented year on a £70m MRO facility in Nagpur,companies like Airbus and Boeing with a India, which when finished will servicesignificant opportunity to offer more aircraft up to three 737s at one time. They havesupport and expand their integrated MRO also set up GoldCare which providescontracts. MRO services for the 787 Dreamliner. Airbus is expanding its aftermarket We expect further expansion of MRO presence, as demonstrated by its new activity from aircraft OEMs over the integrated MRO contracts with major mid-term, including some acquisitions. Figure 5: Correlation between EBIT margins and proportion of service revenues in selected OEMs 18% 16% 14% Embraer SA The Boeing Company 12% Percentage EBIT Bombardier Inc 10% European AeronauƟc Defence 8% and Space Company EADS N.V. 6% Rolls-Royce Holdings plc PraƩ-Whitney 4% 2% Catalyst Corporate Finance LLP 2012 0% 0% 10% 20% 30% 40% 50% 60% 70% Percentage Revenue from ServicesSource: Catalyst Corporate Finance, Company annual reports, CapIQ
  8. 8. Global Aerospace Sector M&A update Average EBITDA Tier 3 and 4 forced to consolidate to meet multiples paid OEM demands and fight global competition for businesses in Raw material and component suppliers Allegheny Technologies Incorporated (ATI) 2012 is 9.4x have been forced to consolidate in recently acquired Ladish for £514m in order order to address the increasing to offer customers more advanced forging demands of OEM and Tier 1 customers, and casting solutions for titanium and and address intense competition nickel based alloys. PCC acquired from global competitors. Primus in January 2011 for £535m allowing it to integrate upstream (raw materials) OEMs and Tier 1 customers require ever with downstream (machining) activities. increasing levels of technical and process This was an exit for PE firm Oak Hill sophistication from their suppliers, which Capital who held the investment for require investment in plant and equipment just under 5 years. and working capital. Equally, more and more capacity is being created by manufacturing As Figure 6 shows, the vast majority of clusters in low cost regions, weakening aerospace assets currently held by bargaining power with customers and North American and European PE funds putting pressure on margins. Tier 3 are within Tiers 2, 3 and 4 of the supply and 4 suppliers have therefore acquired chain. We expect exits to facilitate businesses, both horizontally and vertically, more consolidation. in order to strengthen their market positions.Significant numbers of Financial buyers are in a holding patternPE-backed businesses Private equity investors have height of the financial bubble at high completed around 175 aerospace deals valuation multiples, and the PE investors pending exits since 2007 and exited in the region of are waiting on the right time to sell them just 65. Analysis shows that today there to achieve their target returns. are 120 aerospace assets being held by PE funds in Europe and North America, We expect this imbalance of investments / as shown in Figure 7. exits to unwind and believe significantly more assets will come to market in the next Of the investments made in 2007 for couple of years – especially if banking terms example, it is estimated that there are still are reaching maturity. over 30 being held by PE owners. Many of these businesses were acquired at the Figure 6: Distribution of PE assets Figure 7: Current PE owned aerospace by position in the supply chain assets by year of purchase Tier 1: Systems 25 IntegraƟon; 14% Tier 2: Sub-assembly Number of live PE assets manufacture; 25% 20 Other 15% 15 Catalyst Corporate Finance LLP 2012 10 MROs 4% 5 0 2007 2008 2009 2010 2011 2012 Tier 4: Materials Tier 3: Make-to-print and processes; 15% components; 27% Europe North America Source: Catalyst Corporate Finance Source: Catalyst Corporate Finance
  9. 9. Global Aerospace Sector M&A update Figure 8: Selected recent aerospace M&A transactions Date Target Country Description Acquirer Country EV (£m) Sep-11 Designs, manufactures and supplies United Technologies Goodrich Corp USA USA 11,378 (Pending) systems and services Corporation Aviation training and technical May-12 Oxford Aviation Academy UK CAE Inc Canada 195 support services Manufactures safety and Feb-12 AmSafe, Inc USA TransDigm Inc USA 483 securement equipment Aerospace logistics integrated supply Jan-12 UFC Aerospace Corp. USA BE Aerospace Inc USA 259 chain solutions Produces the V2500 engine for the Dec-11 International Aero Engines AG USA Pratt & Whitney Company USA 963 A320 family of aircraft Nordisk Aviation Products & Manufactures baggage and cargo Dec-11 Germany AAR Corp USA 177 Telair International GmbH handling systems Dec-11 Aerosource Inc USA Provider of repair and overhaul services Safran SA France N/D Manufacture and distribution of Nov-11 Weston EU Limited UK Senior Plc UK 54 aerospace components Hampson Industries PLC Manufacture and supply of Oct-11 UK Bridgepoint Capital UK 52 (Shims Business) shim components Manufactures structural components Sep-11 Primus International Inc USA Precision Castparts Corp USA 550 and assemblies Distributes production parts and Sep-11 Satair A/S Denmark Airbus (EADS) France 309 spare parts for aircraft Aug-11 Anixter Aerospace Hardware USA Manufactures components and provides Greenbriar Equity Group USA 114 inventory management services Provides aerospace and defense Jul-11 Pattonair UK Exponent Private Equity UK 146 supply chain services globally Performs repair and overhaul services Jun-11 Vector Aerospace Corp Canada EADS Netherlands 394 on turbine engines Manufactures connectors for aeronautics, Jun-11 Souriau SAS France Esterline Technologies Corp USA 428 space and defence applications Produces flight critical systems Goodrich Actuation May-11 Microtecnica S.r.l. Italy UK 292 (actuation and thermal control) Systems Limited Produces metal components for jet May-11 Ladish Co, Inc USA Allegheny Technologies Inc USA 514 engines and helicopter rotor hubs Pacific Scientific Aerospace Apr-11 USA Manufactures aviation safety equipment Meggitt Plc UK 440 Business of Danaher Corp Develops decorative materials for Aug-11 Schneller, Inc USA TransDigm Group Inc USA 176 aviation sector Teledyne Continental Motors Manufactures piston engines used in Aviation Industry Corp of Apr-11 USA China 119 Catalyst Corporate Finance LLP 2012 Inc small propeller-driven aircraft China (AVIC) Produces nickel alloy specialty engine Mar-11 Valley-Todeco Inc, USA USA Alcoa Inc USA 154 fasteners and airframe bolts Aviation Industry Corp of Feb-11 Cirrus Industries Inc USA Manufacturers private jets China 125 China (AVIC)Source: Catalyst Corporate Finance
  10. 10. Global Aerospace Sector M&A update Positive outlook Prospects for M&A for M&A Despite the uncertainty surrounding Our analysis of M&A spend patterns of the the European economy and delays to top 30 aerospace businesses worldwide next generation build programmes, we (see Figure 10) suggests a stable and expect that M&A activity will continue slightly increasing commitment to to be robust for the next few years acquisitions. Coupled to this appetite, these given all the factors outlined above and strategic buyers also have significant fire the relative strength of the sector power, as we can see from their average compared to the wider economy. cash positions. Figure 9: Aerospace composite valuation indices 65% 55% 45% 35% 25% 15% 5% -5% -15% 9 9 10 0 0 1 1 2 1 09 10 2 11 -1 -1 -1 -0 -0 -1 -1 -1 -1 n- p- n- n- p ec ar p ec ec ar ar n Se Ju Se Se Ju Ju Ju M M M D D D OEMs Tier 1 Suppliers Other Suppliers (Tier 2-4) FTSESource: CapIQ In particular, we expect to see: Financial investors have demonstrated strong interest in the aerospace sector over Continued Tier 1 supplier consolidation the long term and we expect this to aimed at systems integration continue for high quality assets. Continued cross-border aerospace Given the ongoing constraints in the credit acquisitions with a greater proportion markets, PE investors will tend to acquire involving parties outside the established only when trade interest is weak or when North American and European countries the shareholders want to avoid selling to competitors. OEMs investing in aerospace service businesses to increase the proportion of We expect the investment/exit imbalance to revenues from non-manufacturing correct and more PE assets to come onto Catalyst Corporate Finance LLP 2012 activities the market in the next two years. Smaller deals involving Tier 2, 3 and 4 suppliers to strengthen their leverage with clients
  11. 11. Global Aerospace Sector M&A update Figure 10: Cash positions and M&A spend of M&A supported by strong cash positions aerospace sector (30 companies) 1,600 250 1,596 1,400 1,505 Average Cash Position £m 200 Acquisition Spend £m 1,200 1,350 1,000 150 800 600 100 400 50 200 0 0 2 Years Ago 1 Year Ago Most Recent Quarter Cash position £m Acquisition Spend £mSource: Catalyst Corporate Finance, CapIQ Find out more If you would like to discuss this report in more detail, please contact us. Mark Humphries David Stewart Partner, Catalyst Corporate Vice President, ICF Finance International + 44 (0) 121 654 5000 +44 (0) 20 7242 9333 Mark is a Partner at Catalyst David has more than and has nearly twenty years 29 years of experience of experience in M&A. His in aviation. He has led main responsibilities include assignments with leading advising on MBOs, fund aerospace manufacturers, raising, company acquisitions and disposals. Whilst service suppliers, and airlines in Europe, North Mark has transacted across multiple sectors, he leads America, Africa, the Middle East, and Asia Pacific, Catalyst Corporate Finance LLP 2012 Catalyst’s Industrials sector team. Before joining developing significant experience in the airline, Catalyst, Mark spent three years in the M&A team at aircraft equipment, and maintenance sectors. FTSE100 engineering company GKN plc leading David is a recognised expert in low-cost airline many cross-border transactions. operations and business models and the maintenance, repair, and overhaul (MRO) market.
  12. 12. International experience Through our international partnership, Mergers Alliance, Catalyst Corporate Finance provides: Access to overseas buyers International M&A Research Local knowledge of M&A culture Identifying targets overseas and tactics and executing acquisitions Catalyst Corporate Finance ICF SH&E Award-winning international corporate finance advice For almost 50 years, ICF SH&E has been providing objective, independent regulatory, Catalyst advises management teams, technical, financial, and commercial private shareholders and corporates on: guidance to aviation clients, including Buying businesses airlines, airports, financial institutions, (MBOs/MBIs/BIMBOs) lessors, OEMs, MROs, airline service suppliers, governments, and heads Selling businesses of state. Searching for businesses to acquire, both in the UK and overseas From offices in North America, South America, Europe, China, Asia, and Africa, Investment opportunities for we help aviation clients manage assets and private equity firms operations, mitigate risk, and maximize Maximising shareholder value return on investment. This is all we do and all we want to do. ʻMid Market Adviser of the Yearʼ 2011 www.catalystcf.co.uk www.icfi.com/aviation London: 5th Floor, 12-18 Grosvenor Gardens 3rd Floor, Kean House, 6 Kean Street London SW1W 0DH London WC2B 4AS Tel: +44 (0) 20 7881 2960 Tel: +44 (0) 20 7242 9333 Birmingham: 9th Floor, Bank House, 8 Cherry Street Birmingham B2 5AL Catalyst Corporate Finance LLP 2012 Tel: +44 (0) 121 654 5000 Nottingham: 21 The Triangle, ng2 Business Park Nottingham NG2 1AE Tel: +44 (0) 115 957 8230Catalyst Corporate Finance LLP is a limited liability partnership registered in England & Wales (registered number OC306421)Registered Office: Bank House, 8 Cherry Street, Birmingham, B2 5ALCatalyst Corporate Finance LLP is authorised and regulated by the Financial Services Authority (number 478406)

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