Aerospace and defense deals insights: 2021 midyear outlook

Aerospace and defense deals take off

The industry experienced record deal values and volumes in the first quarter of the year, with one large transaction (AerCap/GECAS) skewing the average. This activity capped off a very positive trend established since the second quarter of last year, with both values and volumes climbing steadily. Notably, three of the largest transactions in the first half of 2021 were urban air transportation companies merging with special purpose acquisition companies (SPACs) (Lilium GmbH, Joby Aero and Archer Aviation). A fourth SPAC deal for RocketLab USA also broke into the period’s top 10 transactions. We see SPACs continuing their presence in aerospace and defense (A&D) for the near term at the very least.

The two most recent quarters tell entirely different stories, with the second quarter of 2021 falling back sharply from records hit in the first quarter. We expect a recovery in the third quarter of 2021 given the underlying fundamentals and the continuing recovery from the effects of COVID-19 on the industry.

Commercial air upturn expected

COVID-19 largely derailed commercial aerospace dealmaking in 2020, leaving the lion’s share of activity in defense. Portfolio shaping and several significant transactions among defense and government services players buoyed values and volumes over the last three quarters of 2020. However, signs of life in commercial aero began to emerge later in the year and, more notably, during the first half of 2021. Our view is that while defense will remain active alongside ever-evolving geopolitical tensions, an essentially flat Biden defense budget may keep moves in check. We do believe commercial activity, however, will be bolstered as lower-tier suppliers damaged during the pandemic present targets for larger, better capitalized entities.