It has been a lean few years for large mergers and acquisitions – and not just in aerospace. Broadly, since the shock of the 2008-9 financial crisis settled down companies have been holding onto cash and waiting out a period of stability characterised by low interest rates and inflation, high fuel and commodity prices, and minimal GDP growth in major economies.
In aerospace, strong civil market growth and full orderbooks have kept everybody moving forward. Defence-focused companies have been holding fire, as uncertainty about US government spending plans makes it difficult to value potential acquisition targets.
Surprisingly for a period following such a traumatic financial upset, distress sales have been few. Private equity owners have had to postpone their exits, as trade sales have been hard to arrange and market hunger virtually nil for initial offerings – despite soaring equity prices.
The 2012 deal that saw Pratt & Whitney, Sikorsky and Hamilton Sundstrand parent UTC absorb Goodrich for an industry-record $16.5 billion was a very high-profile exception. Likewise the ultimately abandoned plan to merge Airbus – then still called EADS – with BAE Systems.
Things started to change in 2014. A brief mid-year burst of mergers and acquisitions – so-called “corporate activity” – raised expectations but then petered out, in any case not really touching aerospace, where M&A deals have been reasonably large in number but relatively small in value. Tactical acquisitions, that is, rather than strategic manoeuvres.
But the broad economic background of the post-crisis period is best described as an unstable equilibrium, which suddenly looks more like unstable than like equilibrium. During the second half of 2014, the US and UK economies finally started showing signs of sustained growth. But while that growth has led to speculation about when the Federal Reserve and the Bank of England will finally raise interest rates from effectively zero, the eurozone has lurched back toward crisis, Brazil has stagnated and China is looking like a crisis waiting to happen.
Russia, meanwhile, is reeling from economic sanctions imposed over its disruption of the European geopolitical environment, and the powder keg that is the Middle East is actually on fire, with all the potential for global upheaval that implies.
All of these events – unravellings – have shown up in what is probably the shift that is most significant, at least in the short term, for aerospace: the price of oil. After holding steady for nearly three years in the $110-120 per barrel range, Brent Crude (followed in lockstep by jet fuel) is toying with $60. Few oil watchers will be surprised if it ends up closer to $40.
credit Rex Features
Where oil goes from there is for the future to tell, but the overarching lesson to take from the past several months is that investors are getting nervous. In recent years, low interest rates have meant poor returns from lending, and likewise from government bonds. Equities have been the main source of returns, but investors are clearly sensing that the bull run is stumbling, if not ending.
Companies, then, are going to have to start taking action – and there’s plenty of evidence that the “animal spirits” that drive M&A are finally rising.
For aerospace, the sum total of all these movements promises to make 2015 a year of at least minor upheaval. The year is set to start out with the late-January closing of the merger between ATK and Orbital Sciences, to form a pure-play rockets and spacecraft company. Three facts stand out.
Firstly, ATK has its eye on a looming US Air Force requirement to end the reliance for national security launches on the RD-180 rocket motor used in the Atlas V. RD-180s come from Russia, and their supply has been cut off in the sanctions battle over Ukraine. Secondly, both companies have substantial solid fuel rocket motor expertise. Thirdly, ATK is spinning off its sporting ammunition business prior to marrying Orbital.
This deal, then, says a lot about what should be driving the broader aerospace industry.
By merging, ATK and Orbital probably both improve their chances if the USAF looks for an all-new launch system. Their merger could give them a genuine technology advantage at a critical moment.
Also, their merger is looking like a sound response to a shifting geopolitical environment. And ATK is shedding a non-related business. Generally, investors do not like conglomerates, and there are recent examples of corporate splits that suggest companies – their share prices, anyway – can benefit from falling into line.
All three of these angles may feature in aerospace this year, and a rising number of small deals to the consolidate corners of the industry are likely. Big, transformative M&A moves, though, look unlikely – if only because companies have also learned caution.
One firm to watch is Rolls-Royce. The UK engine maker made the news in late 2014 when one analyst proposed it spin off its non-aerospace businesses. Such a drastic move is unlikely, but do expect a major strategy statement around mid-year – possibly including a roadmap for getting the company back into the narrowbody airliners market.
Airbus, meanwhile, enters 2015 with much work to do. Profitability is taking a tumble, hit by A380 sales woes and an A330 slump as airlines wait for the neo version. A350 ramp-up execution matters, so don’t expect any big, BAE merger-style moves. However, one thing we know about Airbus is that it really does have the capacity to surprise…
Also intriguing is Dassault Aviation. With Airbus looking to sell down its minority stake in the company – a legacy of Mitterand-era nationalisation policies – the maker of Falcon business jets and Rafale fighters is being put on the spot. Simply, the opportunity to buy out Airbus leaves Dassault having to define just what it would do differently. A buyout would cost several billions of euros, and Dassault would have to justify the investment – to itself (there are no other significant shareholders) and to the French government, which is its principal stakeholder beyond its parent, Groupe Industriel Marcel Dassault.
Do not expect any dramatic moves from Dassault. It could, though, look to offload the short quarter of shares it holds in Thales to pay for buying out Airbus, and that move would open the way for a broader ownership shuffle in the French aerospace industry. The best guess is that nothing will happen in 2015 – but if shares shift, expect Dassault, Safran and Thales to close the year in charge of their own destinies, free of the cross-shareholdings and partial state holdings that have made French aerospace a parallel universe.
Speaking of parallel universes, Finmeccanica faces another difficult year. Its debt burden may be paid down a bit with the sale – finally – of its struggling rail businesses. But management will have to start showing that its plan for turning the core aerospace businesses into profit-spinners has real legs.
Meanwhile, keep an eye on ATR, its joint venture with Airbus. Rumblings near the ground suggest Airbus is less anxious than Finmeccanica to push ATR forward with, say, the launch of a 90-seat turboprop. If that dream is to move ahead, Finmeccanica may need a new partner – or to buy out Toulouse. Crazier things have happened.
Source: FlightGlobal.com
