Aerospace and defense deals insights: Midyear 2020

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While the impact of COVID-19 has been far more pronounced for commercial aerospace, the entire A&D sector has been affected significantly.

Many industry executives believe commercial aerospace could take three years or more to recover to the revenue passenger mile levels seen in 2019. Production cutbacks have taken place and liquidity is at an all-time premium, as aviation demand has dropped by an estimated 90%. These factors have rippled through the commercial aftermarket as well and set a clear low watermark for deal making. While the defense side of the industry has fared far better, general uncertainty has hampered M&A activity and contributed to two notable transactions being cancelled in H1 2020.

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“COVID-19 has had drastically different effects upon commercial aerospace and defense, but the two industries have a shared ecosystem that influences both sub-sectors in terms of M&A activity.”

- Bob Long, US Aerospace and Defense Deals Leader

High level trends and highlights

  • Not surprisingly, the Aerospace and Defense (A&D) sector has experienced a notable decline in deals volume and value in the first half of 2020.
  • Total deal value in H1 2020 amounted to $15.4 billion, a decrease of 34% compared to the ten-year average and a decrease of 78% as compared to H1 2019, driven primarily by the UTC/Raytheon transaction in 2019. In H1 2020, total deal volume declined by 17% to 186 deals compared to 225 deals in H1 2019.
  • After a successful end of 2019 and a promising start in Q1 2020, there was a precipitous drop in activity with the emergence of COVID-19. Seven out of the top ten deals were completed before COVID-19 social distancing took effect in the US and Europe.
  • The top 10 deals totaled $12.6 billion, including one megadeal accounting for 82% of the total deal value in H1 2020.

 

  • The sector experienced a decline in transaction value and volume across all major sub-sectors except Aircraft & Parts, which witnessed a 75% increase in H1 2020 as compared to H1 2019.
  • The Aircraft & Parts, Arms & Vehicles and Electronic Equipment sub-sectors together exhibited the highest deal value and volume in the period, accounting for 95% of the total deal value and 75% of total deal volume. Nine of the top ten deals in H1 2020 belong to these three sub-sectors.
  • Among these three sub-sectors, Arms & Vehicles accounted for 39% of deal value and the only megadeal in H1 2020 belonged to this sub-sector. Aircraft & Parts contributed the greatest number of transactions in H1 2020 and also accounted for five of the top ten deals.

 

  • Within-border deals provided the majority of H1 2020 deal value and volume. The transactions contributed 76% of deal volume and 78% of deal value in the period. Within-border transactions accounted for six out of the top ten deals in H1 2020, including the Sembcorp Marine Ltd. spin of 69.89% interest to shareholders for $5.4 billion (deal status – pending).

  • Asia and Oceania dominated H1 2020 disclosed deal value and volume. The players in the region were the most active acquirers with $7.8 billion, or 51% share in terms of deal value, driven by the Sembcorp transaction announced in H1 2020.
  • North America contributed the next highest deal value of $6.4 billion. However, the number of disclosed transactions in the region decreased by 26% in H1 2020 as compared to H1 2019.
  • Africa and South America were notably low in in H1 2020, both in terms of disclosed deal value and volume.

 



Aerospace and defense sub-sector analysis

Aircraft & Parts contributed the greatest share to the sector in terms of deal volume in H1 2020 (33%) and experienced a 75% increase in total deal value from H1 2019. Due to COVID-19 and other strategic reasons, two major deals terminated in the period,  including Boeing’s termination of its acquisition of Embraer’s commercial aviation business for $4.2 billion and Woodward and Hexcel’s proposed merger.

Arms & Vehicles contributed the greatest in terms of deal value, accounting for a 39% share in H1 2020 driven by the $5.4 billion Sembcorp spin in H1 2020. The sub-sector also contributed one megadeal of $8.8 billion in H1 2019.

Electronic Equipment contributed 23% of total deal value in H1 2020. The sub-sector had three deals among the top ten in H1 2020.

Raw Materials & Supplies, Software & Security Systems and Supporting Services sub-sectors combined to account for 25% of the total deal volume. However, they contributed only a 5% share of transaction value.


Financial vs. strategic investors

Strategic investors contributed 44% and 68% of total deal value and volume, respectively, in H1 2020. Financial buyers remained active in the sector and contributed a higher share of deal value, largely driven by the Sembcorp transaction.


Aerospace and defense deals outlook

The industry, like many others, has been massively impacted by the events of the first half of 2020. There can be no question that commercial players are facing a long recovery period involving major changes to their businesses, as well as those that support them. Operating models have already adjusted and will continue to do so as companies focus relentlessly on liquidity and, in some cases, their very survival. While these factors may drive some troubled assets to market, we believe the overall state of play will keep commercial aerospace deal making at greatly reduced levels from recent years.

On the defense side, there is a somewhat brighter picture. Budgets have held to relatively positive figures and shifting geopolitical tensions will continue to necessitate spending in selected areas. When it comes to M&A, we believe the concern facing defense players is one of a broader overall uncertainty in the markets and the path of the pandemic. Regardless of perceived strategic fit and value, buyers will no doubt be exercising the highest levels of caution as they approach assets. Accordingly, while we see greater deal opportunities in the defense area, we also expect announced transactions to remain at relatively depressed levels. 

About the data

The information presented in this report is an analysis of deals in the global aerospace and defense industry. Deal information was sourced from Refinitiv and includes deals for which targets have an SIC code that falls into one of the 14 aerospace and defense industry groups. Certain adjustments have been made to the information to exclude transactions which are not specific to aerospace and defense or incorporate relevant transactions that were omitted from the SIC industry codes.

This analysis includes all individual mergers, acquisitions, and divestitures for disclosed or undisclosed values, leveraged buyouts, privatizations, minority stake purchases, and acquisitions of remaining interest announced between July 1, 2017 and June 30, 2020, with a deal status of completed, partially completed, pending, pending regulatory and pending completion, and excludes all rumors and seeking buyers. Additionally, transactions that are spin-offs through distribution to existing shareholders are included.

Percentages and values are rounded to the nearest whole number which may result in minor differences when summing totals.

Contact us

Bob Long

Aerospace and Defense Deals Leader, PwC US

Scott Thompson

Aerospace and Defense Leader, PwC US

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