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Aerospace and defense deals insights: 2021 midyear outlook

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2:40

What's driving deals in 2021

PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for the rest of 2021.

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. 


Key deal drivers

The nature of capital

The industry witnessed a flurry of SPAC activity in the first half of 2021, most notably in the first quarter. Four of the top 10 deals were SPAC transactions, three of which involved urban air travel companies. SPACs have had a notable role in A&D deals for some time now, particularly in space and satellites, but their presence recently seems much more prominent. While it’s difficult to assess when and to what extent this trend may broaden to other subsectors within A&D, we believe SPACs will continue to be a valid route to market for the industry in the near term. 

COVID-19 recovery

Commercial air traffic has rebounded, but most observers do not expect full recovery until 2023 or 2024. While aircraft utilization is up, there remains a significant number of parked aircraft. Production is on the rise, but it is expected to be a relatively slow climb to full rate. Despite these factors, there has not been significant consolidation to date, nor a large number of bankruptcies. We believe this has resulted in “deferred maintenance” within the tier II/III supplier base which may manifest itself in acquisition opportunities for original equipment manufacturers and larger players. Our view is that the need to shore up supply chains and the search for diversification across platforms should both contribute to increased activity in the second half of 2021.  

“Geopolitical tensions will continue to support defense dealmaking despite a flat budget, but we believe commercial activity will be the key driver over the remainder of the year as companies position themselves alongside a post-pandemic recovery.”

— Bob Long, US aerospace and defense deals leader

Contact us

Bob Long

Aerospace and Defense Deals Leader, PwC US

Scott Thompson

Global Aerospace and Defense Leader, PwC US

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