M&A activity in the Aerospace and Defence sector busiest in 30 years

Download

Canadian deal takes centre stage

Merger and acquisition (M&A) activity in the Canadian aerospace & defence (A&D) sector exceeded expectations in the first quarter of 2011, with the pace rising significantly this quarter compared to 2008-2010. Globally, it was the highest first quarter total for announced deals the global A&D sector has seen in more than 30 years, according to a new PwC deals report.

Q1 saw the announced acquisition of Canada’s Vector Aerospace by Eurocopter, a subsidiary of EADS, for $611 million—the largest Canadian deal in the A&D space in more than three years. There have been no deals of this magnitude in the Canadian A&D sector since the fourth quarter of 2007 when Hexagon AB of Sweden acquired Canada’s Novatel for US$430 million.

With the cyclical nature of transactions in the A&D sector, Canada is tracking ahead when compared to the economic recovery cycle from 2002-2005, when Canadian A&D transactions averaged US$834 million per year on an average of just under two transactions per year. This compared to global averages of US$15.5 billion and just under 31 transactions per year. For 2011, we expect a reversion to the mean in terms of the number of deals and average transaction value as the global economy continues to rebound and more companies, both within and outside of Canada, resume the search for growth prospects in the A&D sector.

The outlook appears positive for increased Canadian A&D deal activity, pending potential risks associated with the strong Canadian dollar and rising fuel prices. In this regard, PwC expects four key themes for the Canadian A&D sector for the remainder of 2011:

1. Increased defense deal-making: Canadian defence spending has traditionally not been a key driver for the Canadian A&D sector. However the recent Conservative majority win bodes well for military programs such as the F-35 Joint Strike Fighter and military helicopters. Deal-making among small-to-medium size players to achieve scale ahead of expected subsector strengthening may be on the horizon.”
2. Fuel prices and strong Canadian dollar to affect A&D: Oil price volatility in 2010-2011 combined with geopolitical uncertainty in the Middle East impedes OEMs and suppliers from forecasting volumes and planning for production. As such, we expect many firms to adopt a “wait and see” approach to M&A until oil prices stabilize. Similarly, the rising Canadian dollar relative to the US dollar and the Euro—the two major end-markets for Canadian products—may impact deal valuation on the sell side. On the flip side, a strong dollar also puts Canadian A&D firms in a better position to buy abroad.
3. M&A as a tool to achieve scale: As OEMs continue to reduce the number of suppliers they work with; more small-to-medium size A&D players may merge to demonstrate sufficient scale. Also, further consolidation may be spurred by new demand from high-growth markets such as China and India.
4. Deals to rise in MRO subsector: PwC expects firms in the maintenance, repair and overhaul (MRO) sector to be attractive targets for M&A. Large OEMs may acquire pure-play MRO firms as part of an industry-wide trend of moving towards a “lease and service” business model, rather than an “outright sale” business model. This could be positive for Canada, where a cluster of MRO firms generate more than $3 billion in annual revenues, with the recent acquisition of Vector Aerospace by EADS being a case in point.